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

Shang-Jin Wei, Jungho Lee and Jianhuan Xu

No 15805, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: 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.

Keywords: Trade surplus; Pollution; And transportation cost (search for similar items in EconPapers)
JEL-codes: F18 F32 (search for similar items in EconPapers)
Date: 2021-02
New Economics Papers: this item is included in nep-env and nep-int
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