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Mind the (current account) gap

Mark Joy, Noëmie Lisack, Simon Lloyd, Dennis Reinhardt (), Rana Sajedi and Simon Whitaker ()
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Simon Whitaker: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 43, Bank of England Financial Stability Papers from Bank of England

Abstract: There is substantial evidence that openness to trade raises economic growth and boosts living standards. But trade liberalisation has been asymmetric, focused on goods rather than services trade. The decline in goods trade barriers may have favoured countries specialising in goods, like China, Germany and Japan, allowing them to increase exports relative to imports, and contributing to their persistent current account surpluses. By contrast, countries like the United States and the United Kingdom, who specialise in the services sector where trade is more restricted, have been running persistent deficits. This pattern of persistent surpluses and deficits in these key countries has proven hard to explain in the International Monetary Fund’s External Balance Assessment methodology. This paper suggests that asymmetric trade liberalisation is one overlooked explanation. We demonstrate how realistic additions to textbook economic models allow trade policy to have persistent effects on current account imbalances. We also find empirical support for significant quantitative effects. These results suggest that liberalising services trade, levelling up to the liberalisation seen in goods trade, could reduce excess global imbalances by around 40%. Moreover it could contribute to higher and more inclusive global growth.

Keywords: Comparative advantage; Current account; Global imbalances; Services trade policy; Trade liberalisation (search for similar items in EconPapers)
JEL-codes: F13 F14 F15 F32 F62 F68 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2018-01-24
New Economics Papers: this item is included in nep-acc, nep-eec, nep-int and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:boe:finsta:0043

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