Targeting Australia’s Current Account: A New Mercantilism?

Anthony Makin

Economic Analysis and Policy, 1988, vol. 18, issue 2, 199-212

Abstract: This paper questions some widespread concerns about Australia’s current account deficit, including the level of absorption and external debt. Influences on the external accounts which lie beyond effective policy control in the short run, viz. the terms of trade and the “valuation” effect of earlier depreciations, are shown to have been the main factors widening the deficit over recent years. With the terms of trade fluctuating sharply, the exchange rate should be allowed to float more freely to bring about the necessary restructuring of the economy. A macroeconomic policy response directed toward the current account imbalance per se is reminiscent of mercantilism and seems misplaced in the light of Australia’s dependence on capital imports. “… the mechanism of foreign trade is self adjusting and attempts to interfere with it are not only futile, but greatly impoverish those who practise them …” [Keynes (1936) p.333].

Date: 1988
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