Any U.S. current-account deficit must be accompanied by a foreign-capital inflow of equal magnitude. Movements in dollar exchange rates and changes in the spreads between U.S. and foreign interest rates preserve this balance in our international accounts. How far exchange rates and interest rates must adjust to maintain this equilibrium, however, depends on both the financial instrument and the output that the capital finances. Capital flows into liquid assets are prone to rapid, abrupt flight that can produce swift, extensive exchange- and interest-rate adjustments. Likewise, flows that sustain domestic consumption may require larger rate adjustments than flows sustaining domestic investment.
Suggested citation: “Current-Account Deficits,” Federal Reserve Bank of Cleveland, Economic Trends, no. 98-09, pp. 18, 09.01.1998.