TY - JOUR AU - Freund, Caroline AU - Warnock, Frank TI - Current Account Deficits in Industrial Countries: The Bigger They are, the Harder They Fall? JF - National Bureau of Economic Research Working Paper Series VL - No. 11823 PY - 2005 Y2 - December 2005 DO - 10.3386/w11823 UR - http://www.nber.org/papers/w11823 L1 - http://www.nber.org/papers/w11823.pdf N1 - Author contact info: Caroline Freund The World Bank MC3-301 1818 H Street, NW Washington, DC 20433 Tel: 202-458-8250 Fax: 202-522-1159 E-Mail: cfreund@worldbank.org Francis E. Warnock Darden Business School University of Virginia Charlottesville, VA 22906-6550 Tel: 434/924-6076 Fax: 434/243-8945 E-Mail: warnockf@darden.virginia.edu M1 - published as Caroline Freund, Frank Warnock. "Current Account Deficits in Industrial Countries: The Bigger They Are, The Harder They Fall?," in Richard H. Clarida, editor, "G7 Current Account Imbalances: Sustainability and Adjustment" University of Chicago Press (2007) AB - There are a number of worrisome features of the U.S. current account deficit. In particular, its size and persistence, the extent to which it is financing consumption as opposed to investment, and the reliance on debt inflows raise concerns about the likelihood of a sharp adjustment. We examine episodes of current account adjustment in industrial countries to assess the validity of these concerns. Our main findings are (i) larger deficits take longer to adjust and are associated with significantly slower income growth (relative to trend) during the current account recovery than smaller deficits, (ii) consumption-driven current account deficits involve significantly larger depreciations than deficits financing investment, and (iii) there is little evidence that deficits in economies that run persistent deficits, have large net foreign debt positions, experience greater short-term capital flows, or are less open are accommodated by more extensive exchange rate adjustment or slower growth. Our findings are consistent with earlier work showing that, in general, current account adjustment tends to be associated with slow income growth and a real depreciation. Overall, our results support claims that the size of the current account deficit and the extent to which it is financing consumption matter for adjustment. ER -