Current Account Deficits: The Australian Debate

Rochelle Belkar, Lynne Cockerell and Christopher Kent
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Rochelle Belkar: Reserve Bank of Australia
Lynne Cockerell: Reserve Bank of Australia
Christopher Kent: Reserve Bank of Australia
Authors registered in the RePEc Author Service: Rochelle Guttmann

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: This paper documents the clear change of view, which has taken place in Australia over the past three decades or so, concerning the relevance of the current account deficit for policy. Historical experience under a fixed exchange rate regime suggested that large persistent deficits were unsustainable and could leave the economy vulnerable to sudden reversals in sentiment. These concerns persisted after the floating of the Australian dollar and financial deregulation, and it was thought that all arms of policy should help to rein in the then much larger current account deficits. However, these policies were shown to be ineffective and, by the early 1990s, the argument that current account deficits represent the optimal outcomes of decisions made by ‘consenting adults’ gained wide support. This paper presents some empirical evidence consistent with optimal smoothing in the face of temporary shocks; the persistence of the deficit is attributed to a modest degree of impatience relative to the rest of the world. Although it is now widely accepted that policy should not seek to influence the current account balance, the issue of external vulnerability remains of interest. Here, country-specific considerations are important, and it is argued that the factors that have made Australia relatively resilient to external shocks are also those that helped to attract foreign capital in the first place.

Keywords: current account; external vulnerability; exchange rate regimes (search for similar items in EconPapers)
JEL-codes: E60 F32 N10 (search for similar items in EconPapers)
Date: 2007-03
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Chapter: Current Account Deficits: Tha Australian Debate (2008)
Working Paper: Current Account Deficits: The Australian Debate (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:rba:rbardp:rdp2007-02

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