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Current Account Deficits: The Australian Debate

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Author Info
Rochelle Belkar
Lynne Cockerell
Christopher Kent
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.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 450.

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Date of creation: Dec 2007
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Handle: RePEc:chb:bcchwp:450

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "The intertemporal approach to the current account," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 34, pages 1731-1799 Elsevier. [Downloadable!] (restricted)
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  2. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops," NBER Working Papers 10276, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Milbourne, Ross & Otto, Glenn, 1992. "Consumption Smoothing and the Current Account," Australian Economic Papers, Blackwell Publishing, vol. 31(59), pages 369-84, December.
  4. Ricardo J Caballero & Kevin Cowan & Jonathan Kearns, 2004. "Fear of Sudden Stops: Lessons from Australia and Chile," RBA Research Discussion Papers rdp2004-03, Reserve Bank of Australia. [Downloadable!]
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  5. Guy Debelle & Michael Plumb, 2006. "The Evolution of Exchange Rate Policy and Capital Controls in Australia," Asian Economic Papers, MIT Press, vol. 5(2), pages 7-29, June. [Downloadable!] (restricted)
  6. Milesi-Ferretti, G-M & Razin, A, 1996. "Current-Account Sustainability," Princeton Studies in International Economics 81, International Economics Section, Departement of Economics Princeton University,.
  7. Bergin, Paul R & Sheffrin, Steven M, 2000. "Interest Rates, Exchange Rates and Present Value Models of the Current Account," Economic Journal, Royal Economic Society, vol. 110(463), pages 535-58, April. [Downloadable!] (restricted)
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  8. Cashin, Paul & McDermott, C John, 1998. "Are Australia's Current Account Deficits Excessive?," The Economic Record, The Economic Society of Australia, vol. 74(227), pages 346-61, December.
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  9. Nikola Dvornak & Marion Kohler & Gordon Menzies, 2003. "Australia’s Medium-run Exchange Rate: A Macroeconomic Balance Approach," RBA Research Discussion Papers rdp2003-03, Reserve Bank of Australia. [Downloadable!]
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  10. Campbell, John Y, 1987. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," Econometrica, Econometric Society, vol. 55(6), pages 1249-73, November. [Downloadable!] (restricted)
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  11. Glenn Otto, 2003. "Can an Intertemporal Model Explain Australia's Current Account Deficit?," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 36(3), pages 350-359. [Downloadable!] (restricted)
  12. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-88, October. [Downloadable!] (restricted)
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  13. Chapman, B.J. & Gruen, F., 1990. "An Analysis Of The Australian Consensual Incomes Policy: The Prices And Incomes Accord," CEPR Discussion Papers 221, Centre for Economic Policy Research, Research School of Social Sciences, Australian National University.
  14. David Gruen & Amanda Sayegh, 2005. "The Evolution of Fiscal Policy in Australia," Oxford Review of Economic Policy, Oxford University Press, vol. 21(4), pages 618-635, Winter.
  15. J. D. Pitchford, 1989. "A Sceptical View of Australia's Current Account and Debt Problem," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 22(2), pages 5-14. [Downloadable!] (restricted)
  16. Makin, A.J., 1988. "Targeting Australia’s Current Account: A New Mercantilism?," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 18(2), pages 199-212. [Downloadable!]
  17. Chay Fisher & Christopher Kent, 1999. "Two Depressions, One Banking Collapse," RBA Research Discussion Papers rdp1999-06, Reserve Bank of Australia. [Downloadable!]
  18. Jocelyn Horne, 2001. "The Current Account Debate in Australia: Changing Policy Perspectives," Research Papers 0111, Macquarie University, Department of Economics. [Downloadable!]
  19. Christopher Kent & Kylie Smith & James Holloway, 2005. "Declining Output Volatility: What Role for Structural Change?," RBA Research Discussion Papers rdp2005-08, Reserve Bank of Australia. [Downloadable!]
  20. Glick, Reuven & Rogoff, Kenneth, 1995. "Global versus country-specific productivity shocks and the current account," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 159-192, February. [Downloadable!] (restricted)
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  21. Michael Bordo & Barry Eichengreen, 1999. "Is our Current International Economic Environment Unusually Crisis Prone?," RBA Annual Conference Volume, in: David Gruen & Luke Gower (ed.), Capital Flows and the International Financial System Reserve Bank of Australia. [Downloadable!]
  22. Chris Becker & Daniel Fabbro, 2006. "Limiting Foreign Exchange Exposure through Hedging: The Australian Experience," RBA Research Discussion Papers rdp2006-09, Reserve Bank of Australia. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Neil Dias Karunaratne, 2008. "The Polemics and Empirics of the Sustainability of Australia’s Current Account Deficit - Revisited," Discussion Papers Series 364, School of Economics, University of Queensland, Australia. [Downloadable!]
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