(Why) Should Current Account Balances Be Reduced?

15 Pages Posted: 5 Mar 2011

See all articles by Olivier J. Blanchard

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics

Gian Maria Milesi-Ferretti

International Monetary Fund (IMF); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: March 1, 2011

Abstract

This note discusses two complex issues. First, why might a country want to reduce its current account deficit or surplus? And second, why might the international community ask for more? In general, there are both domestic and multilateral reasons for countries to reduce current account deficits and surpluses. We identify three instances in which the case for reducing imbalances rests on multilateral considerations: the cross-border effects of sudden stops, "unfair competitive advantage," and worries about global demand if part of the world economy is in a liquidity trap. We briefly discuss the implications of our analysis for the setting of "rules of the game" in a multilateral context.

Keywords: global imbalances, current account, exchange rates

JEL Classification: E21, E22, F32, F33, F36, F41

Suggested Citation

Blanchard, Olivier J. and Milesi-Ferretti, Gian Maria, (Why) Should Current Account Balances Be Reduced? (March 1, 2011). Available at SSRN: https://ssrn.com/abstract=1774984 or http://dx.doi.org/10.2139/ssrn.1774984

Olivier J. Blanchard

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Gian Maria Milesi-Ferretti (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Room 9-700
Washington, DC 20431
United States
202-623-7441 (Phone)
202-589-7441 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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