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Feasible Limits for External Deficits and Debt

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  • Makin Anthony J

    ()
    (Professor, Department of Accounting, Finance & Economics, Griffith University, Australia)

Abstract

Large current account deficits and foreign debt levels remain a source of concern for international financial markets and policymakers. Yet, exactly what an “excessive” external deficit or liability position for an advanced economy is at any time has never been adequately defined. This article addresses the question by proposing new methods for assessing the proximity of current account deficits and the associated foreign debt to their upper bounds. It contends that productive investment fundamentally sets the feasible limit for current account deficits, whereas the capital to output ratio ultimately sets the foreign debt to GDP limit. Benchmark estimates for the United States, Australia, New Zealand and the United Kingdom, advanced economies that have borrowed heavily since 1990, reveal external deficits have usually been well within limits, although recent United States experience is an exception.

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Bibliographic Info

Article provided by De Gruyter in its journal Global Economy Journal.

Volume (Year): 5 (2005)
Issue (Month): 1 (March)
Pages: 1-16

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Handle: RePEc:bpj:glecon:v:5:y:2005:i:1:n:1

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  1. Ghosh, Atish R & Ostry, Jonathan D, 1995. "The Current Account in Developing Countries: A Perspective from the Consumption-Smoothing Approach," World Bank Economic Review, World Bank Group, vol. 9(2), pages 305-33, May.
  2. Sebastian Edwards, 2002. "Does the Current Account Matter?," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 21-76 National Bureau of Economic Research, Inc.
  3. Catherine A. Pattillo & Andrew Berg, 1998. "Are Currency Crises Predictable? a Test," IMF Working Papers 98/154, International Monetary Fund.
  4. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  5. Assaf Razin, 1993. "The Dynamic-Optimizing Approach to the Current Account: Theory and Evidence," NBER Working Papers 4334, National Bureau of Economic Research, Inc.
  6. Caroline L. Freund, 2000. "Current account adjustment in industrialized countries," International Finance Discussion Papers 692, Board of Governors of the Federal Reserve System (U.S.).
  7. Milesi-Ferretti, G-M & Razin, A, 1996. "Current-Account Sustainability," Princeton Studies in International Economics 81, International Economics Section, Departement of Economics Princeton University,.
  8. Catherine L. Mann, 1999. "Is the U.S. Trade Deficit Sustainable?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 47.
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Cited by:
  1. Anthony Makin & Wei Zhang & Grant Scobie, 2009. "The contribution of foreign borrowing to the New Zealand economy," New Zealand Economic Papers, Taylor & Francis Journals, vol. 43(3), pages 263-278.

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