<p>This depends on the exchange rate regime. For a floating exchange rate, the balance of payments is always in equilibrium, that is, the financial account always offsets the current (and capital) account. A hypothetical deficit is avoided by a depreciating exchange rate, a hypothetical surplus is avoided by appreciation.</p>

<p>For a fixed exchange rate regime, the central bank will offset the exchange rate adjustments that guarantee the equilibrium under floating exchange rates. In order to offset these adjustments, the CB has to intervene in the exchange markets. To prevent a currency from depreciating, the CB has to use its foreign reserves to buy its own currency. To avoid an appreciation, the CB has to buy foreign currency and icrease its foreign reserves.</p>

<p>To sum up, as an answer to your question: BoP imbalances only occur in a fixed exchange rate regime and are caused by foreign exchange interventions of the CB. Therefore, the imbalance is equal to the settlements balance, or the change in the CB's reserve assets.</p>

CC BY-SA 3.0
2015-12-05T10:13:45.187Z
But why then almost every country has some imbalance i.e. either a BoP deficit or surplus. Even countries with highly flexible exchange rates like the United States.
Sub-Optimal
CC BY-SA 3.0
2015-12-05T10:24:20.360Z
This deficit refers to a current account deficit. I haven't checked the data for US specifically, but the deficit on the current account should be offset by the capital account. Unless the Fed is intervening the exchange market, but I do not believe that this is the case.
Wecon
CC BY-SA 3.0
2015-12-05T12:01:17.890Z
Maybe I was a bit confused between the definitions part. The reserve transfer transactions between central banks is not accounted in the capital account. It is added separately in the BoP . The BoP surplus or deficit that we hear about is actually the sum of Current Account balance and Capital Account balance and not the reserve transfers. 
Eventually, the sum of BoP surplus or deficit plus any reserve transfers plus any statistical errors will always sum to 0. Thanks a lot
Sub-Optimal
CC BY-SA 3.0
2016-03-13T09:36:43.027Z
Please note my edit. I mistakenly used "capital account" instead of "financial account" in my post. I corrected this error. In my comment of Dec 5, capital account should also be changed into financial account. If you check the data, you will note that the capital account is generally very neglegible.
Wecon
CC BY-SA 3.0
2015-12-05T10:05:46.677Z
2016-03-13T09:32:47.930Z
2016-03-13T09:32:47.930Z
Wecon
<p>Theoretically the capital account balance should fully offset the current account balance and the BoP should be zero for any economy. What causes the imbalance or discrepancy in the overall BoP ? What makes countries run BoP surplus or deficits ?</p>

<open-economy-macro><balance-of-trade>
What makes the Balance of Payments (BoP) to imbalance?
Sub-Optimal
# What makes the Balance of Payments (BoP) to imbalance?

(Asked by: username_0 on 2015-12-04)

Theoretically the capital account balance should fully offset the current account balance and the BoP should be zero for any economy. What causes the imbalance or discrepancy in the overall BoP ? What makes countries run BoP surplus or deficits ?

**Tags:** open-economy-macro, balance-of-trade


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## 1 answers

### Answer by username_1 on 2015-12-05. Score: 4

This depends on the exchange rate regime. For a floating exchange rate, the balance of payments is always in equilibrium, that is, the financial account always offsets the current (and capital) account. A hypothetical deficit is avoided by a depreciating exchange rate, a hypothetical surplus is avoided by appreciation.

For a fixed exchange rate regime, the central bank will offset the exchange rate adjustments that guarantee the equilibrium under floating exchange rates. In order to offset these adjustments, the CB has to intervene in the exchange markets. To prevent a currency from depreciating, the CB has to use its foreign reserves to buy its own currency. To avoid an appreciation, the CB has to buy foreign currency and icrease its foreign reserves.

To sum up, as an answer to your question: BoP imbalances only occur in a fixed exchange rate regime and are caused by foreign exchange interventions of the CB. Therefore, the imbalance is equal to the settlements balance, or the change in the CB's reserve assets.

> **Comments:**
> **username_0**: But why then almost every country has some imbalance i.e. either a BoP deficit or surplus. Even countries with highly flexible exchange rates like the United States.  
> **username_1**: This deficit refers to a current account deficit. I haven't checked the data for US specifically, but the deficit on the current account should be offset by the capital account. Unless the Fed is intervening the exchange market, but I do not believe that this is the case.  
> **username_0**: Maybe I was a bit confused between the definitions part. The reserve transfer transactions between central banks is not accounted in the capital account. It is added separately in the BoP . The BoP surplus or deficit that we hear about is actually the sum of Current Account balance and Capital Account balance and not the reserve transfers.  Eventually, the sum of BoP surplus or deficit plus any reserve transfers plus any statistical errors will always sum to 0. Thanks a lot  
> **username_1**: Please note my edit. I mistakenly used "capital account" instead of "financial account" in my post. I corrected this error. In my comment of Dec 5, capital account should also be changed into financial account. If you check the data, you will note that the capital account is generally very neglegible.  

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