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May 03, 2005

Ben Bernanke's Views on Global Economic Policy

He writes:

FRB: Speech, Bernanke--U.S. current account deficit--April 14, 2005 : I disagree with the view... that balancing the federal budget by itself would largely defuse the current account issue.... [E]ven if we could balance the federal budget tomorrow, the medium-term effect would likely be to reduce the current account deficit by less than one percentage point of GDP. [More likely 1.5-2%, IMHO.]

Although I do not believe that plausible near-term changes in the federal budget would eliminate the current account deficit, I should stress that reducing the federal budget deficit is still a good idea. Although the effects on the current account... would likely be relatively modest, at least the direction is right. Moreover, there are other good reasons to bring down the federal budget deficit.... Similar observations apply to policy recommendations to increase household saving in the United States.... Although the effect of saving-friendly policies on the U.S. current account deficit might not be dramatic, again the direction would be right. Moreover, increasing U.S. national saving from its current low level would support productivity and wealth creation and help our society make better provision for the future.

However, as I have argued today, some of the key reasons for the large U.S. current account deficit are external to the United States... purely inward-looking policies are unlikely to resolve this issue. Thus a more direct approach is to help and encourage developing countries to re-enter international capital markets in their more natural role as borrowers... improve their investment climates by continuing to increase macroeconomic stability, strengthen property rights, reduce corruption, and remove barriers to the free flow of financial capital. Providing assistance to developing countries in strengthening their financial institutions--for example, by improving bank regulation and supervision and by increasing financial transparency--could lessen the risk of financial crises and thus increase both the willingness of those countries to accept capital inflows and the willingness of foreigners to invest there....

Other changes will occur naturally... the pace at which emerging-market countries are accumulating international reserves should slow.... Domestic investment in East Asia and in other emerging markets will eventually recover.... The various factors underlying the U.S. current account deficit--both domestic and international--are likely to unwind only gradually, however. Thus, we probably have little choice except to be patient...

Posted by DeLong at May 3, 2005 08:17 PM