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Are Current Account Deficits a Problem for Australia ?

The issue that Susan Collins addresses in her paper is whether the buildup of net foreign indebtedness from current account deficits requires a policy response to eliminate these deficits. I am an outsider to this debate with my area of expertise focussing on issues of how monetary policy should be best conducted. In the past, I have committed in print to the proposition that the two main goals that a central bank should pursue are price stability and financial stability. One question raised by Susan’s paper is whether a central bank should pursue a third goal in the conduct of monetary policy: the elimination of current account deficits. Susan’s answer for Australia is no, although she does hedge her bets a little bit by indicating that in some situations, as in the case of Japan during the postwar adjustment years from 1953-1964, using monetary policy to manipulate the current account may not have been a bad policy. I, on the other hand, want to come down much stronger against the use of monetary policy to manipulate the current account: under no conditions should the monetary authority focus on the current account as a target of its policy.