Tuesday, 1 May 2012

Parker on the current account

From the NZ Herald:
Labour's finance spokesman David Parker says the current account deficit, which New Zealand has run continuously for decades and which is set to expand again, is the country's largest economic problem.
Actually the current account deficit is not "the country's largest economic problem", it isn't a problem at all. With a floating exchange rate there is an automatic adjustment mechanism in place. This is one advantage of a floating exchange rate, current/capital account deficits/surpluses are self-correcting.

What may be more troubling is that the current account deficit may be a signal of problems in the wider economy. But the answer here is not to attempt to intervene in the exchange rate - as some would have us do -but to find and fix the actual problem. At worst a deficit is a symptom of a disease but it is not the disease itself.

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