Australia's Current Account Deficit, National Savings and Industry Policy

The argument that there exist a causal link between national savings and current account deficits is often simplistically formulated in terms of national income accounting identities. However the validity of formulating national saving-argmenting policies to target current account deficits is open to much debate when the possible theoretical linkages between these aggregates are investigated more closely. In particular; if the adjustment mechanism to external balance is expenditure driven rather than relying on exchange rate induced relative price changes, the alternative case of interventionist policy to promote net exports is strengthened. Theoretical arguments opposing the use of interventionist trade policies are often derived form inappropriately constructed, or simplistically interpreted, economic models.