... an individual agent suggests periods of saving (equivalent to a CA surplus) and dissaving (CA deficit). Examples may include Japan which because it has an ageing population, it may be building up international assets in order to use them for future consumption. Similarly, it could be argued that it may be efficient for Britain to smooth out its consumption from the unstable revenues from oil production by resorting to the international financial markets. I believe that this theory has been very useful in dispelling the up to then prevalent view that every CA deficit is evil and has to be eliminated by government action as soon as possible. Nevertheless, this theory is often taken to extremes by arguing that every CA disequilibrium, caused by the private sector, is optimal and no policy response is needed. There are 2 main reasons why private optimising behaviour may not lead to socially optimum ...

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