(Why) Should Current Account Balances Be Reduced?

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