In the developing world, the East Asian economies that went through financial crises in the late 1990s have seen a plunge in their investment rates even as their saving rates have remained extremely high; the weakness in domestic demand has likely motivated the authorities in these countries to keep their exchange rates competitive to promote export-led growth, a strategy that has also contributed to the U.S. external deficit.5 More generally, since 1999, the developing countries as a whole have been running current account surpluses - with the industrial countries, mainly the United States, necessarily running current account deficits - for the first time in many years.
What does our macroeconomic simulation model say about the likely effect of a slump in foreign consumption and investment spending? The slump lowers the path of foreign GDP, which in turn limits U.S. export sales. Additionally, by depressing perceived rates of return abroad, the weakness in foreign demand explains a considerable portion of the run-up in the dollar, as shown in figure 4.