Producer Services and the Current Account

Abstract In this paper, we present evidence that countries which experienced a larger expansion of services as a share of GDP in recent years exhibited lower current account balances. We argue that this relationship is compatible with the notion that producer services raise aggregate productivity by enhancing increasing returns to specialization, and we develop a model in which the deregulation of the services industry results in higher GDP growth, a reallocation of resources into the services industry, and a temporary current account deficit. We demonstrate that our theoretical argument is supported by the data, even if we control for a multitude of other factors that potentially affect the current account. Finally, we relate our study to the IMF’s external balance assessment (EBA) exercise and demonstrate that, for several countries, the “current account gap” shrinks if we account for producer services.