Imf Discussions

IMF

STAFF

DISCUSSION

NOTE

March 1, 2011

SDN/11/03

(Why) Should Current Account Balances Be Reduced?

Olivier Blanchard and Gian Maria Milesi-Ferretti

I N T E R N A T I O N A L

M O N E T A R Y

F U N D

INTERNATIONAL MONETARY FUND Research Department (Why) Should Current Account Balances Be Reduced? Prepared by Olivier Blanchard and Gian Maria Milesi-Ferretti1 Authorized for distribution by Olivier Blanchard March 1, 2011

DISCLAIMER: This Staff Discussion Note represents the views of the authors and does not necessarily represent IMF views or IMF policy. The views expressed herein should be attributed to the authors and not to the IMF, its Executive Board, or its management. Staff Discussion Notes are published to elicit comments and to further debate.

JEL Classification Numbers: Keywords: Authors’ E-mail Addresses:

E21, E22, F32, F33, F36, F41 global imbalances; current account; exchange rates oblanchard@imf.org; gmilesiferretti@imf.org

We are grateful to George Akerlof, Caroline Atkinson, Tam Bayoumi, Ricardo Caballero, Stijn Claessens, Jörg Decressin, Nicolas Eyzaguirre, Josh Felman, Jean Pierre Landau, Reza Moghadam, Antonio Spilimbergo, Ted Truman, Kenichi Ueda, and David Vines for useful comments.

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3 TABLE OF CONTENTS

Executive Summary .................................................................................................................. 4 I. Introduction ........................................................................................................................... 5 II. Why Might a Country Want to Reduce Its Current Account Deficit or Surplus ................. 5  A. Current Account Deficits: Possibly Unwise, and Unsustainable ..................................... 5  B. Current Account Surpluses: Possibly Unwise, but largely Sustainable ........................... 6 III. Multilateral Considerations...