Among the limits that we have been pressing against are those in our external and budget balances. In the United States, we have been incurring ever-larger trade deficits, with the broader current account measure moving into the neighborhood of 6 percent of our gross domestic product. Yet the dollar's real exchange value, despite its recent decline, remains above its 1995 low.
The following are suggested as possible reasons for this: (1) changes in the economic structure which have resulted in a greater weight on less volatile components of demand such as consumption of services; (2) smaller fluctuations in the inventory cycle due to improved inventory management by firms; and (3) increased central bank credibility and the resulting stability of inflation expectations which have allowed central banks to avoid substantial tightenings of monetary policy that cause sharp economic downturns.