United States: Selected Issues
Author: International Monetary Fund
Publication Date:
15 Sep 1999
eISBN:
9781451839579
ISBN:
9781451839579
Language:
English
Keywords:
ISCR; CR; U.S. official development assistance; Phillips curve; dollar; price; outlay; deficits in the United States; rule in the United States; dollar-denominated asset; interest rates in the United States; fiscal consolidation in the United States; Current account; Private savings; Current account balance
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This Selected Issues paper on the United States analyzes the measures of potential output, natural rate of unemployment, and capacity utilization. Traditionally, measures of resource utilization have been used as indicators for the potential build-up of inflation pressures, and hence as guides for the formulation of macroeconomic policy. The paper highlights that the most commonly used indicators of resource utilization in the United States are the output gap, the employment gap, and capacity utilization in industry. The paper also analyzes the wage and price determination and productivity trends in the United States.

Abstract

This Selected Issues paper on the United States analyzes the measures of potential output, natural rate of unemployment, and capacity utilization. Traditionally, measures of resource utilization have been used as indicators for the potential build-up of inflation pressures, and hence as guides for the formulation of macroeconomic policy. The paper highlights that the most commonly used indicators of resource utilization in the United States are the output gap, the employment gap, and capacity utilization in industry. The paper also analyzes the wage and price determination and productivity trends in the United States.

VI. Long-term Sustainability of the U.S. Current Account Balance1

1. During the period 1960–81, the United States experienced current account surpluses, which averaged about 0.3 percent of GDP. Since 1981, the United States has run persistent current account deficits. As a result, the United States has shifted from a net external creditor to a debtor position, which amounted to about 18 percent of GDP in 1998. Concerns about the persistence of large current account deficits relate primarily to whether the value of the U.S. dollar will be subject to continuous downward pressure and to the sustainability of the capital inflows to the United States to finance these deficits. If such inflows were to represent over time an increasing share of the world’s savings, the situation could pose considerable risks that investors, beyond some point, would be less willing to continue accumulating dollar-denominated assets.

2. The prospects for the long-term sustainability of the U.S. external current account are explored using the IMF’s multicountry model (MULTIMOD). Several scenarios are used to assess the long-run implications for the U.S. current account and the exchange rate of population aging and of alternative fiscal policy rules in the United States and in other industrial countries. In the main scenarios, the fiscal policy rule for the United States provides for a solution to the financing needs of Social Security and Medicare and maintains balance in the rest of the budget, while other industrial countries balance their budgetary positions.

3. In the medium term, such a fiscal consolidation in the United States would lead to a marked reduction in the U.S. current account deficit and lower U.S. interest rates. The U.S. dollar would tend to depreciate slightly (by 5–7 percent in real terms) over the medium term, before appreciating slowly over the longer term. The U.S. current account deficit as a share of the rest of the world savings would fluctuate between 1–2½ percent in the long term, which compares favorably to its average of 2½ percent during the last two decades, suggesting that future current account deficits in the United States would not put substantial pressure on world savings and remain financeable. Nonetheless, the results underscore the need for the United States to run a prudent fiscal policy as a means of ensuring a sustainable current account position over the long term.

A. Long-Term Prospects for the U.S. Current Account in a Multicountry Context

4. To assess the long-term sustainability of the U.S. external balance, illustrative scenarios were generated using MULTIMOD over the period to 2070. In the main scenario, under a central fiscal policy rule in the United States and balanced budgets in other industrial countries, the U.S. external current account deficit would fall from about 3½ percent of GDP in 1999 to 1 percent of GDP in 2007–10, and stabilize at a deficit of about ¼ percent of GDP through 2070 (Figure 1 and Table 1).2 The scenario also suggests that private savings would decline to about 1 IVi percent of GDP over the next three years (Figure 2), before rising gradually and stabilizing around 15½ percent of GDP in 2070. Private investment would slow down primarily reflecting the effects of demographic changes in output.3 Long-term interest rates in the United States would decline sharply over the next six years, reflecting the consolidation of domestic and foreign budgetary positions, before rising as a result of lower budget surpluses in the United States (Figure 3)4 The US, dollar would depreciate by 5–7 percent in real terms through 2005, and would appreciate modestly over the long term (Figure 4).

Figure 1.
Figure 1.

United States: Current Account Balances

(In percent of GDP)

Citation: IMF Staff Country Reports 1999, 101; 10.5089/9781451839579.002.A006

Figure 2.
Figure 2.

United States: Private Savings and Investment, 1998–2070

Citation: IMF Staff Country Reports 1999, 101; 10.5089/9781451839579.002.A006

Source: Fund staff estimates.
Figure 3.
Figure 3.

United States: Long-Term Interest Rates

(In percent)

Citation: IMF Staff Country Reports 1999, 101; 10.5089/9781451839579.002.A006

Figure 4.
Figure 4.

United States: Real Exchange Rate

Citation: IMF Staff Country Reports 1999, 101; 10.5089/9781451839579.002.A006

Table 1.

United States: Long-Term Macroeconomic Projections 1/

article image
Source: Fund staff estimates.

Based on the central fiscal policy rule in the United States, and a balanced budget in other industrial countries.

Defined as the ratio of population under 20 years plus 65 and above to working-age population.

On a NIPA basis.

5. In an alternative scenario, where the United States and other industrial countries both balance their budgets, the simulations show a smaller improvement in the U.S. current account deficit (see Figure 1), The U.S. current account would decline from a deficit of about 3½ percent of GDP in 1999–2000 to an average of roughly 1¾ percent of GDP beyond 2020. Interest rates in the United States would be higher, and the U.S. dollar would be more depreciated over the long term. Private savings in the United States would be significantly higher than in the main scenario over the medium term, while investment would be lower, as a generally smaller fiscal adjustment in the United States would tend to strengthen private savings and “crowd-in” less investment (see Figure 2). However, over the longer term, private savings and investment under the balanced budget scenario would remain somewhat below their levels in the main scenario, reflecting the front-loaded nature of the fiscal adjustment in the main scenario.

6. In the case where other industrial countries do not balance their budgetary positions, the central fiscal policy rule in the United States would result in a larger improvement in the U.S. external current account (see Figure 1). Further fiscal consolidation in the United States would raise national saving relative to other industrial countries, while less fiscal consolidation abroad would reduce foreign and global saving. Hence, world and U.S. interest rates would decline by less. The resulting differences in the income-expenditure patterns between the United States and other industrial countries—reflecting a more uneven pattern of fiscal adjustment—would result in a larger medium-term depreciation of the U.S. dollar, ranging between 10–15 percent in real terms.

B. Sources and Magnitude of Capital Inflows to the United States

7. To illustrate the importance of the available external financing for U.S. current account deficits, Table 2 summarizes the main components of the U.S. capital account for the period 1990–98. The U.S. current account deficit rose from 1.3 percent of GDP in 1993 to 2.6 percent in 1998. Net portfolio and other investment flows accounted for most of the financing, exceeding what was needed to finance the current account deficit.5 The sheer volume and the recent rapid growth of U.S. private portfolio liabilities is particularly remarkable—rising from less than $70 billion in 1991 to more than $620 billion in 1997, before falling back to $330 billion in 1998 (Table 3).

Table 2.

United States: Balance of Payments, 1990–98

(In billions of U.S. dollars)

article image
Source: Department of Commerce, Bureau of Economic Analysis.
Table 3.

United States: Gross Financial Account Liabilities, 1985–98

(Billions of dollars)

article image
Sources: Department of Commerce, Bureau of Economic Analysis; and Fund staff estimates.

In percent of country’s gross national savings.

8. Japan has remained an important provider of capital to the United States, accounting for about 13 percent on average of the total capital inflows during the 1990s. However, other regions have increased their relative importance. Inflows from the European Union have risen markedly since 1996 accounting for about 41 percent of the total in 1998.6 The rest of the world has been the most important source of financing in the 1990s but its importance has diminished somewhat over the last few years. In the 1990s, the rest of the world accounted for around 60 percent of the total U.S. gross financial account liabilities.

9. The U.S. current account deficit as a proportion of gross savings in the rest of the world has declined in the 1990s to an average level of 2 percent, compared with 4½ percent in the second half of the 1980s, However, this ratio has risen sharply since 1997, reaching close to 4¼ percent in 1998 and is envisaged to increase further to about 5½—6 percent in 1999. The simulations show that the share of savings in the rest of the world needed to finance U.S. current account deficits is likely to remain high in the next few years before declining gradually over the longer term (Figure 5). In the main scenario, the U.S. current account deficit would peak at about 5¾ percent of world savings in 1999–2000 and would gradually decline to an annual average of about 1 percent around 2020–30, before gradually rising to about 2½ percent by the end of the scenario. These simulations show that tighter fiscal policy in the United States would reduce reliance on savings in the rest of the world and adds support to the view that a moderate current account deficit would be sustainable over the long term.

Figure 5.
Figure 5.

United States: Current Account Deficit as a Share of Rest of the World Savings

(In percent)

Citation: IMF Staff Country Reports 1999, 101; 10.5089/9781451839579.002.A006

List of References

  • Humpage, Owen, 1998, “Is the Current-Account Deficit Sustainable?” Federal Reserve Bank of Cleveland, October.

  • International Monetary Fund, 1998, “Exchange Rate Assessment: Extensions of the Macroeconomic Balance Approach, edited by Peter Isard and Hamid Faruqee, IMF Occasional Paper No. 167. Occasional Paper 167 (Washington D.C: International Monetary Fund).

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  • International Monetary Fund, 1995, World Economic Outlook, May (Washington D.C: International Monetary Fund).

  • Masson, Paul, Bayoumi Tamim and Samiei, Hossein 1995, “Saving Behavior in Industrial and Developing Countries,” Staff Studiesfor the World Economic Outlook, International Monetary Fund, September.

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  • OECD, 1996, “Future Global Capital Shortages: Real Threat or Pure Fiction?”

1

Prepared by Martin Cerisola, Hamid Faruqee, and Alexander Keenan.

2

The central fiscal policy rule for the United States is assumed to put Social Security and Medicare in long-term actuarial balance, while maintaining the remainder of the unified budget in balance from 1999 on. Other industrial countries are assumed to balance their budgets gradually by 2005, which would bring their debt as a proportion of GDP down from 40 percent in 2005 to roughly zero over the long term. Panel estimates based on IMF (1998) suggest that, if the United States and the rest of the world had been at internal equilibrium, and their real exchange rates at the medium-term equilibrium, the U.S. current account deficit would have been 1–1 Vi percent of GDP in 1998 based on the structural fiscal balance, and the relative demographic positions prevailing in the United States and other industrial countries in that year.

3

Demographic changes would tend to put an upward pressure on interest rates as dependency ratios rose and saving propensities fell. However, since the rate of aging is faster in other industrial countries than in the United States, the rise in relative consumption abroad would tend to depreciate the U.S. dollar real exchange rate over the medium term. Over the long term, the real exchange rate would tend to appreciate so as to stabilize U.S. net foreign assets at its higher steady state level

4

Under the central scenario, the U.S. budget balance rises to an average of about 3.6 percent of GDP between 2004 and 2010, and declines gradually over the long term, before shifting into deficit between 2060 and 2070.

5

The remainder reflects the change in official reserve assets and the statistical discrepancy in the U.S. balance of payments.

6

The reported sources of capital inflows should be interpreted with some caution. In particular, capital flows from the EU may be overstated since a significant share of those inflows may in fact reflect flows from other regions intermediated through the United Kingdom.

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Cover IMF Staff Country Reports
United States: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 1999: Issue 101
Publisher:
International Monetary Fund
ISBN:
9781451839579
ISSN:
1934-7685
Pages:
107
DOI:
https://doi.org/10.5089/9781451839579.002

United States: Current Account Balances

(In percent of GDP)

United States: Private Savings and Investment, 1998–2070

United States: Long-Term Interest Rates

(In percent)

United States: Real Exchange Rate

United States: Current Account Deficit as a Share of Rest of the World Savings

(In percent)