Summary of WP/91/54
“Current Account Deficits, External Liabilities, and Economic Policy” by John Pitchford
Although there is now greater acceptance that macroeconomic policy should not target the current account, some economists still argue for it and some governments still practice it. The paper assesses the policy significance of foreign liabilities and the current account deficits that give rise to them from the starting point of an ideal world in which unrestricted private foreign investment would be optimal. Relaxing these ideal conditions provides a way of evaluating the argument that the size and flow of private indebtedness could signify policy problems.
The paper concludes that while deficits and debt may have some capacity to suggest the existence of difficulties elsewhere in the economy, at best, they are imperfect indicators and, at worst, they may be very misleading if wrongly interpreted. The paper points out that the successful pursuit of internal balance could be crucial to the stabilization of current account balances. Apart from this, there seems to be no good reason for using macro policy to target the current account, although there may be grounds for microeconomic action to remedy problems that can be clearly identified. It would then seem preferable to concentrate analysis not on current account balances but on the problems, if any, that appear to be at their source.