Inflation distortion of the external accounts

Examines the effect of domestic inflation on recorded measures of the current account of the balance of payments. When domestic inflation is relatively high, it distorts conventionally measured current account deficits. This is because part of the recorded servicing payments on external liabilities are actually capital repayments and hence should be shown on the capital account. Presents estimates of Australia′s inflation‐adjusted current account deficit as an example of the methodology outlined. These estimates suggest that, in practice, Australia′s inflation – adjusted account deficit throughout the 1980s, expressed as a proportion of GDP, was under half the value of the nominal measure. When nominal measures of external deficits differ sub‐stantially from inflation‐adjusted outcomes, they can give misleading signals to policymakers.