(Why) Should Current Account Balances Be Reduced?

Abstract

The purpose of this note is to discuss two complex issues. First, why might a country want to reduce its current account deficit or surplus? And second, why might the international community ask for more? We argue that, in many cases, current account balances reflect underlying domestic distortions. It is then in the interest of the country to remove those distortions and, in the process, reduce imbalances. We then discuss cases where spillover effects, either from deficits or surpluses, suggest a direct role for multilateral surveillance. This process can play two potentially useful roles: first, as a discussion of the differences in assessments; second, as a potentially useful commitment device for countries to implement some of the required but politically unpalatable fiscal or structural adjustments.