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The US Current Account Deficit: Smoothly along the Adjustment Path

Current global imbalances are a source of concern for most economic policy leaders and scholars. As important as explaining how the present situation arose, it is relevant to have a prospective view of what is to follow. The aim of this work is to discuss adjustment and sustainability of the US Current Account deficit and prospective impacts for the world. US Current Account deficit has reached new all time highs, so it seems interesting to assess its adjustment. Based on recent literature and data, an argument for smooth adjustment is put forward. Firstly, theoretical foundations behind a potential smooth adjustment are presented; secondly, soft landing scenarios are tested using Cavallo and Tille (2006) model. The main conclusion is that a soft landing of the dollar is possible. Most importantly, some factors normally unaccounted for might facilitate this smoother resolution.