Policy and Current Account Determination Under Floating Exchange Rates

The paper analyzes the determinants of current account imbalances under floating exchange rates. An important goal of the analysis is to provide a framework within which the sources of, and the remedies for the current account imbalances between the United States, Japan, and the Federal Republic of Germany can be discussed. Particular emphasis is put on the effects of various types of government policies stressing the difference between expenditure-changing and expenditure-switching policies. Short-run and long-run considerations are investigated as well as the role played by expectations and price-level dynamics