Governments aim to maintain a stable current account balance
→ avoiding large and persistent deficits or surpluses

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• Persistent deficits
  → rising foreign debt
  → risk of currency instability
• Persistent surpluses
  → global imbalances
  → over-reliance on exports

👉 Therefore, the goal is sustainable balance, not necessarily zero.

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Fiscal Policy and the Current Account

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Expansionary Fiscal Policy

• ↑ government spending / ↓ taxes
• ↑ disposable income
  → ↑ consumption
  → ↑ imports
  → current account deficit worsens

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Contractionary Fiscal Policy

• ↓ spending / ↑ taxes
• ↓ disposable income
  → ↓ consumption
  → ↓ imports
  → current account improves

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Evaluation

• May reduce deficit
  BUT
  → can slow economic growth and increase unemployment

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Monetary Policy and the Current Account

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Tight (Contractionary) Monetary Policy

• ↑ interest rates
• Attracts foreign capital
  → demand for currency rises
  → currency appreciates

→ exports ↓, imports ↑
→ current account worsens

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Loose (Expansionary) Monetary Policy

• ↓ interest rates
• Capital outflows
  → currency depreciates

→ exports ↑, imports ↓
→ current account improves

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Evaluation

• Effective via exchange rate
  BUT
  → may conflict with inflation objectives

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Supply-Side Policies and the Current Account

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Examples

• Education and training
• Infrastructure
• Technology support

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• ↑ productivity
  → lower costs of production
  → exports become more competitive
  → exports ↑

→ current account improves (long run)

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Evaluation

• Sustainable improvement
  BUT
  → slow impact
  → costly to implement

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Protectionist Policies and the Current Account

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Examples

• Tariffs
• Quotas
• Import restrictions

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• Imports restricted
  → domestic demand shifts to local goods
  → current account improves (short run)

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Evaluation

• Short-term improvement
  BUT
  → higher prices
  → inefficiency
  → risk of retaliation (trade wars)

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Overall Policy Comparison

Policy Type	Impact on Current Account	Time Frame	Key Issue
Fiscal	Affects imports	Short run	Growth trade-off
Monetary	Works via exchange rate	Medium run	Inflation conflict
Supply-side	Improves competitiveness	Long run	Time lag
Protectionism	Reduces imports directly	Short run	Inefficiency & retaliation

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Evaluation

• No single policy is sufficient
  → policy mix is required
• Short-term vs long-term:
  • Protectionism/fiscal → quick effects
  • Supply-side → sustainable solution
• Trade-offs:
  • Reducing deficit
    → may reduce growth or increase inflation

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Final Summary

• Objective: stable current account balance
• Fiscal:
  • Contractionary → improves balance
• Monetary:
  • Lower interest rates → depreciation → improves balance
• Supply-side:
  • ↑ productivity → ↑ exports → long-term improvement
• Protectionism:
  • ↓ imports → short-term improvement
• Best approach:
  → combination of policies balancing short- and long-term goals