The Welfare Cost of a Current Account Imbalance: A "Clean" Effect
According to the existing open-economy macroeconomics literature, a current account surplus is associated with a welfare loss only when distortions exist in either savings or investment, and bilateral imbalances do not matter when holding a country's overall imbalance constant. We propose a new welfare effect even in the absence of such distortions. We also show that the patterns of bilateral imbalances matter for welfare. In our theory, a trade imbalance -- the largest component of a current account imbalance -- interacts with a country's pollution control ("cleanness") regime to generate welfare effects outside the standard channels. In particular, a trade surplus alters the shipping costs and the composition of a country's imports in ways that increase the disutility of pollution.
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Document Object Identifier (DOI): 10.3386/w27276