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Abstract
The current account of the balance of payments is an important variable for policymakers. Deficits in the external current account are the result of the accumulation of net claims of foreigners on residents. The empirical literature considers persistent deficits above 5 percent of GDP to be unsustainable in the long run. Although the recent experience of Mexico and Thailand supports this view, some countries—for example, Australia, Canada, and Japan—have in the past persistently run large current account deficits without facing external problems. Because current account balances are a function of the interaction between private agents’ intertemporal decisions and government policies, current account deficits are in themselves neither a curse nor a blessing.
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