When is a Current Account Deficit Bad?

4 Pages Posted: 10 Oct 2018 Last revised: 29 Mar 2019

See all articles by Sharmila Devadas

Sharmila Devadas

Central Bank of Malaysia

Norman Loayza

World Bank - Research Department

Date Written: October 1, 2018

Abstract

A current account deficit is sustainable when its underlying drivers support a smooth correction in the future. It is unsustainable when symptomatic of macroeconomic imbalances that would eventually trigger disruptive adjustments. Although a current account deficit in itself is neither good nor bad, it is likely to be unsustainable and lead to harmful consequences when it is persistently large, fuels consumption rather than investment, occurs alongside excessive domestic credit growth, follows an overvalued exchange rate, or accompanies unrestrained fiscal deficits. Even though a current account deficit is often paralleled by deteriorating net foreign assets, it may not be as informative about immediate-term financial vulnerabilities as the size, maturity, and currency composition of gross financial stocks.

Keywords: International Trade and Trade Rules, Macroeconomic Management, Demographics

Suggested Citation

Devadas, Sharmila and Loayza, Norman, When is a Current Account Deficit Bad? (October 1, 2018). World Bank Research and Policy Briefs No. 130415. Available at SSRN: https://ssrn.com/abstract=3263512

Sharmila Devadas (Contact Author)

Central Bank of Malaysia

Jalan Dato' Onn
P.O. Box 10922
Kuala Lumpur, 50929
Malaysia

Norman Loayza

World Bank - Research Department ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

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