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Has international borrowing or lending driven Australia's net capital inflow?

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  • Makin, Anthony J.
  • Narayan, Paresh Kumar

Abstract

Over the recent decades the most significant global imbalances have been between Asia-Pacific economies, with most attention directed to the imbalances of the largest economies, China, Japan and the United States. In contrast, this paper examines how external account imbalances and real long term interest rates are determined in smaller open economies. It first derives the proposition that external imbalances and long term interest rates move together whenever saving-investment shocks are predominantly domestically sourced, but move oppositely when saving-investment shocks mainly emanate abroad. It then shows that in the case of Australia, an Asia-Pacific economy that has borrowed heavily from abroad since the mid 1980's, rising net capital inflow has had a statistically significant negative impact on domestic real interest rates. This suggests that over that time net international lending rather than net foreign borrowing was mainly responsible for the variation in its external imbalance and real interest rates.

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Bibliographic Info

Article provided by Elsevier in its journal International Review of Economics & Finance.

Volume (Year): 27 (2013)
Issue (Month): C ()
Pages: 134-143

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Handle: RePEc:eee:reveco:v:27:y:2013:i:c:p:134-143

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Web page: http://www.elsevier.com/locate/inca/620165

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Keywords: Saving; Investment; International borrowing and lending; Australia; Interest rates;

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Cited by:
  1. Xie, Zixiong & Chen, Shyh-Wei, 2014. "Untangling the causal relationship between government budget and current account deficits in OECD countries: Evidence from bootstrap panel Granger causality," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 95-104.

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