Working Paper: NBER ID: w27276
Authors: Jungho Lee; Shangjin Wei; Jianhuan Xu
Abstract: 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.
Keywords: current account imbalance; welfare loss; trade surplus; pollution; shipping costs
JEL Codes: F3; Q52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unit shipping costs (L87) | composition of imports (F10) |
| composition of imports (F10) | pollution (Q53) |
| trade surplus (F14) | pollution (Q53) |
| bilateral trade imbalances (F14) | welfare loss (D69) |
| shipping costs endogenous (L87) | welfare loss (D69) |
| trade surplus (F14) | unit shipping costs (L87) |