Mind the (Current Account) Gap

18 Pages Posted: 8 Mar 2018

See all articles by Mark Joy

Mark Joy

Bank of England

Noemie Lisack

European University Institute

Simon Lloyd

Bank of England

Dennis Reinhardt

Bank of England

Rana Sajedi

Bank of England

Simon Whitaker

Bank of England - Monetary Analysis

Date Written: January 24, 2018

Abstract

There is substantial evidence that openness to trade raises economic growth and boosts living standards. But trade liberalisation has been asymmetric, focused on goods rather than services trade. The decline in goods trade barriers may have favoured countries specialising in goods, like China, Germany and Japan, allowing them to increase exports relative to imports, and contributing to their persistent current account surpluses. By contrast, countries like the United States and the United Kingdom, who specialise in the services sector where trade is more restricted, have been running persistent deficits. This pattern of persistent surpluses and deficits in these key countries has proven hard to explain in the International Monetary Fund’s External Balance Assessment methodology. This paper suggests that asymmetric trade liberalisation is one overlooked explanation. We demonstrate how realistic additions to textbook economic models allow trade policy to have persistent effects on current account imbalances. We also find empirical support for significant quantitative effects. These results suggest that liberalising services trade, levelling up to the liberalisation seen in goods trade, could reduce excess global imbalances by around 40%. Moreover it could contribute to higher and more inclusive global growth.

Keywords: Comparative advantage, Current account, Global imbalances, Services trade policy, Trade liberalisation

JEL Classification: F13, F14, F15, F32, F62, F68

Suggested Citation

Joy, Mark and Lisack, Noemie and Lloyd, Simon and Reinhardt, Dennis and Sajedi, Rana and Whitaker, Simon, Mind the (Current Account) Gap (January 24, 2018). Bank of England Financial Stability Paper No. 43. Available at SSRN: https://ssrn.com/abstract=3120389 or http://dx.doi.org/10.2139/ssrn.3120389

Mark Joy (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Noemie Lisack

European University Institute ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

Simon Lloyd

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

HOME PAGE: http://https://sites.google.com/view/splloyd

Dennis Reinhardt

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Rana Sajedi

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Simon Whitaker

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

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