Mind the (current account) gap

Our Financial Stability Papers are designed to develop new insights into risk management, to promote risk reduction policies, to improve financial crisis management planning or to report on aspects of our systemic financial stability work.
Published on 24 January 2018

Financial Stability Paper No.43
Mark Joy, Noëmie Lisack, Simon Lloyd, Dennis Reinhardt, Rana Sajedi and Simon Whitaker

There is substantial evidence that openness to trade raises economic growth and boosts living standards. But trade liberalisation has been asymmetric, focused on goods rather than services trade. The decline in goods trade barriers may have favoured countries specialising in goods, like China, Germany and Japan, allowing them to increase exports relative to imports, and contributing to their persistent current account surpluses. By contrast, countries like the United States and the United Kingdom, who specialise in the services sector where trade is more restricted, have been running persistent deficits. This pattern of persistent surpluses and deficits in these key countries has proven hard to explain in the International Monetary Fund’s External Balance Assessment methodology. This paper suggests that asymmetric trade liberalisation is one overlooked explanation. We demonstrate how realistic additions to textbook economic models allow trade policy to have persistent effects on current account imbalances. We also find empirical support for significant quantitative effects. These results suggest that liberalising services trade, levelling up to the liberalisation seen in goods trade, could reduce excess global imbalances by around 40%. Moreover it could contribute to higher and more inclusive global growth.

PDF Financial Stability Paper No.43 

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