and Investment in Balancing the Current Account: Some Empirical Evidence

Large and persistent external deficits often lead to calls for policymeasures such as bilateral trade negotiations, tariffs, and importquotas, directed at restoring balance between exports and imports. However, current account deficits ultimately reflect a disparity between savings and investment: Fundamental national income accounting iden-tities ensure that the current account is equal not only to the difference between exports and imports, broadly defined, but also to the difference between savings and investment (Krugman 1991). Therefore, the issue of how current account balance is achieved in practice can be viewed in terms of whether it is savings or investment that adjusts to an external imbalance. To the extent that a country that borrows from abroad does not default on its debt obligations, high current account deficits must eventually be followed by higher national savings or lower investment. In a series of influential articles, Feldstein (1992) argued that while, in the short run, inflows of foreign capital can offset the difference between national investment and national savings, in the long run, the rebalancin