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Abstract

The relationship between the current account balance, whether in deficit or surplus, and the exchange rate, whether appreciating or depreciating, has been a subject of extensive debate among economists regarding its nature and direction. This debate is intensified by the increasing reliance of some nations on foreign investors to finance current account deficits, a dependency that may falter if investors become reluctant to hold assets denominated in those local currencies; a critical economic crisis often ensues when such investors decide to divest from these assets entirely. While "bearish" speculators have traditionally argued that a widening current account deficit inevitably leads to a sharp currency depreciation, empirical evidence has frequently contradicted these expectations. For instance, despite the US current account deficit reaching record levels during the 1990s, the US dollar appreciated rather than declining as conventional theory suggested. This research aims to define the relationship between the current account deficit and the exchange rate over the medium and long term, beginning with an analysis of the fundamental factors that expanded the US deficit to its recent record-breaking levels. The study further examines whether this widening deficit represents a structural imbalance necessitating correction or if specific factors allow the United States to sustain significant deficits beyond conventional limits. Notably, technological advancements in information technology during the 1990s accelerated US economic growth without triggering inflation, while simultaneously boosting investment spending and creating a widening gap between domestic savings and investment. Since the current account deficit is fundamentally equivalent to the savings-investment gap, this persistent disparity necessitated a growing deficit. Finally, the research explores various theoretical and practical approaches to addressing current account imbalances, concluding with observations on the channels through which the current account position influences the exchange rate, summarized by the findings of the US case study

DOI

10.33095/jeas.v14i51.1405

Subject Area

Economics

First Page

159

Last Page

176

Rights

http://creativecommons.org/licenses/by-nc-nd/4.0

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