Economic policies: effects on the German current account

Start of Project 10/2017
End of Project 03/2018

In recent years the German current account balance has risen to extremely high levels both in historical comparison and by international standards. The persistently high current account surpluses are subject to increasing international criticism based on the presumption that they are detrimental to both domestic and foreign economies. Against this backdrop, this study evaluates the effect of eight hypothetical economic policy measures on the current account balance: an increase of public investment as a share of GDP, an increase in public consumption, a reduction of corporate taxes or personal income taxes, an increase in wages, the realization of a comprehensive trade agreement between the EU and the US, a more restrictive monetary policy in the euro area, the implementation of structural reforms in other EU countries, and a general liberalization of services trade in the context of WTO. It is worth noting, however, that policy measures that exclusively aim at reducing the current account balance cannot automatically be conceived as an appropriate economic policy as they may result in unintended side effects in other parts of the economy. Because auf the prominence of the issue in the international debate, the impact of policy measures on the current account balance is nevertheless of substantial interest to policy makers.