DP15805 The Welfare Cost of a Current Account Imbalance: A 'Clean' Channel
|Author(s):||Jungho Lee, Shang-Jin Wei, Jianhuan Xu|
|Publication Date:||February 2021|
|Keyword(s):||and transportation cost, pollution, trade surplus|
|Programme Areas:||International Trade and Regional Economics, Development Economics, International Macroeconomics and Finance|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=15805|
A current account surplus is associated with a welfare loss, according to the existing open-economy macroeconomics literature, only when there are distortions in either savings or investment. We propose a new source of welfare loss even in the absence of such distortions. In particular, a trade surplus, the largest component of a current account surplus for most countries, can alter the shipping costs and the composition of a country's imports and exports in ways that tend to raise the pollution level of the country. Thus, when its pollution tax is low, a trade surplus can produce a welfare loss outside the standard channels.