External Deficits and the Dollar : The Pit and the Pendulum

The large external deficit in the U.S. balance of payments and the exchange value of the U.S. dollar have become central issues of public concern and economic policy.

Unfortunately, the increased concern has not led to an increase in clear thinking.

Confusion is widespread about the reasons for the swelling of the external deficit.

Is increased foreign protectionism a significant cause?

Are structural changes in the U.S. or foreign economies a cause? And uncertainty is rife about the prospects for the future.

Is the external deficit bound to increase, or will it eventually be eliminated by the depreciation of the dollar that began in the spring of 1985?

Will the dollar have to depreciate further? What policy actions, if any, should the United States and foreign governments take to deal with the situation? External Deficits and the Dollar, containing papers and research materials generated for a Brookings workshop held early in 1987, provides cogent answers to all these questions.

The papers both explain the recent history and shed light on policy options for dealing with the deficit and the dollar in the future.

Contributos are William L. Helkie and Peter Hooper, Ralph C. Bryant and Gerald Holtham, and Paul R. Krugman. As background for the papers, and as a major contribution in itself, the volume also reports the results of historical tracking experiments and forward-looking simulations carried out on a uniform basis using leading econometric models.

The project continues the empirical research sponsored by Brookings on macroeconomic policy interactions and policy design for interdependent economies.