Current account deficits in rich countries

2007·1 MB·English

by  Blanchard, Olivier (Olivier J.)

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Massachusetts Institute of Technology
Department of Economics
Working Paper Series
CURRENT ACCOUNT DEFICITS IN RICH COUNTRIES
Olivier Blanchard
Working Paper 07-06
Feb 2007
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Current Account Deficits in Rich Countries
Olivier Blanchard *
February 10, 20007 (first draft: October 30, 2006).
* MIT and NBER. Mundell-Fleming lecture given, at the IMF in November 2006. I thank
Ricardo Caballero, Francesco Giavazzi, Guido Lorenzoni, Andrei Shleifer, Roberto Rigobon,
and Jose Tessada for comments and discussions. I thankTatianaDidier for excellent research
assistance.

Abstract
Current account imbalances have steadily increased in rich countries over the
last 20 years. While the U.S. current account deficit dominates the numbers
and the news, other countries, especially within the Euro area, are also running
large deficits.
These deficits are different from the Latin American deficits ofthe early 1980s,
or the Mexican deficit of the early 1990s. They involve rich countries; they
reflect mostly private saving and investment decisions, and fiscal deficits often
play a marginal role; and the deficits are financed mostly through equity, FDI,
and own-currency bonds rather than through bank lending.
Yet, there appears a widely shared worry that these deficits are too large, and
government intervention is required. My purpose, in this lecture, is to examine
the logic of this argument. I ask the following question: Assume that deficits
reflect private saving and investment decisions. Assume also that people and
firms have rational expectations. Should the government intervene, and, if so,
how?
To answerthe question, I construct asimple benchmark. In the benchmark, the
outcome is first best and there is no need norjustification forgovernment inter-
vention. I then introduce simple distortions in either goods, labor, or financial
markets, and characterize the equilibrium in each case. I derive optimal policy
and the implications for the current account. I show that optimal policy may
or may not lead to smaller current account deficits.
Iseethemodelandtheextensionsverymuch asafirst pass. Sharperconclusions
require abetterunderstandingofthe exactnatureand theextent ofdistortions,
and we do not have it. Such understanding is needed however to improve the
quality ofthe current debate.