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.

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Citation

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