Discussion paper

DP15805 The Welfare Cost of a Current Account Imbalance: A 'Clean' Channel

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.


Lee, J, S Wei and J Xu (2021), ‘DP15805 The Welfare Cost of a Current Account Imbalance: A 'Clean' Channel‘, CEPR Discussion Paper No. 15805. CEPR Press, Paris & London. https://cepr.org/publications/dp15805