Current Issues in Economics and Finance

Financial Globalization and the U.S. Current Account Deficit

December 2007 Volume 13, Number 11
JEL classification: F32, F36

Authors: Matthew Higgins and Thomas Klitgaard

Despite heavy borrowing in recent years, the UnitedStates has financed its large current account deficits without experiencing an unusual buildup in foreign investors’ holdings of U.S. assets. A new analysis suggests that this somewhat surprising development is attributable largely to rapid financial globalization, with cross-border flows worldwide rising as fast as flows into the UnitedStates. However, it could be harder for the country to sustain large deficits on favorable terms if the current wave of globalization subsided or the rate at which U.S. investors buy foreign assets increased.

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