Characterizing Movements of the U.S. Current Account Deficit

It is unclear whether the exceptionally highU.S. current account deficit can be sustained for a prolonged period. In this paper we approach the topic whether a gradual adjustment or a pronounced reduction of the deficit is likely to occur. We therefore characterize the dynamics of the current account deficit movements by a three-regime Markov-Switching model. Our finding is that it is possible to distinguish a regime of a strong increasing deficit, a just slightly increasing deficit and a regime of a deficit reduction. Furthermore we find that movements of the deficit are asymmetric.Whereas expansions of the current account deficit are long lasting, reductions of the deficit are rather short. This implies that a pronounced reduction is not likely to occur. Secondly we try to uncover determinants of regime shifts of the current account. Applying ordered Logit models we conclude that a combination of U.S. inflation, U.S. investment and share prices predicts pronounced changes in the current account deficit quite reliably.