Abstract

Questions Relating to the Normative Interpretation of Current Balance Data

An intertemporal approach to analyzing current balance data initially shows what combinations of fundamental factors, i.e. intertemporal utility and production functions of individual countries, are at the base of current balance surpluses/deficits. According to this approach, surpluses and deficits reflect intertemporal optimization. Under this aspect, the inevitable conclusion is that redressing current account imbalances invariably leads to prosperity losses.

However, any reality-based analysis must take account of adjustment costs and uncertainties as well as of varied distortions on account of taxes, subsidies an regulations; all of them may influence current balances and be at the base of surpluses/ deficits besides fundamental factors.

It would, however, be inappropriate to conclude from the existence of such factors that it would be a matter of political prudence to postulate and pursue the attainment of current balance targets. Prosperity gains can in this way not be made especially when the aim is a general lumpsum reduction of surpluses/deficits without any thorough analysis of the determinants of existing current balance surpluses/deficits.

Moreover, stability policy requirements suggest entirely different optimal current account results depending on whether production and employment fluctuations are caused by supply or by demand conditions. Finally, the implementation of a policy guided by current balance targets would meet with a substantial amount of difficulty, too; from among the possible effects thereof, mention must be made primarily of increasing protectionism and rises in publicsector debts.