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Are Australia's Current Account Deficits Excessive?

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  • C. John McDermott
  • Paul Cashin

Abstract

This paper compares the evolution of the Australian current account balance over the period 1954–94 against an optimal current account derived from a consumption-smoothing model. The findings indicate that the Australian current account was not used to smooth consumption optimally in the period prior to the relaxation of capital controls in the early 1980s. The results also suggest that in the period since the mid-1980s Australia’s current account deficits have become excessive, and that the increase in national saving required to satisfy its external borrowing constraint is about 2 to 4 percent of GDP.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 96/85.

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Length: 28
Date of creation: 01 Aug 1996
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Handle: RePEc:imf:imfwpa:96/85

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  1. Campbell, John Y, 1987. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," Econometrica, Econometric Society, Econometric Society, vol. 55(6), pages 1249-73, November.
  2. Des Moore, 1990. "Debt - Is It Still A Problem?," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 23(3), pages 17-32.
  3. J. D. Pitchford, 1990. "Lewis/Polasek and Moore on the Current Account Deficit: A Comment," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 23(3), pages 33-36.
  4. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, Econometric Society, vol. 58(1), pages 165-93, January.
  5. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, Econometric Society, vol. 59(3), pages 817-58, May.
  6. J. D. Pitchford, 1989. "A Sceptical View of Australia's Current Account and Debt Problem," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 22(2), pages 5-14.
  7. Guest, Ross S & McDonald, Ian M, 1998. "The Socially Optimal Level of Saving in Australia, 1960-61 to 1994-95," Australian Economic Papers, Wiley Blackwell, Wiley Blackwell, vol. 37(3), pages 213-35, September.
  8. Sheffrin, S.M. & Woo, W.T., 1989. "Present Value Tests Of An Intertemporal Model Of The Current Account," Papers, California Davis - Institute of Governmental Affairs 61, California Davis - Institute of Governmental Affairs.
  9. Maurice Obstfeld, 1981. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," NBER Working Papers 0686, National Bureau of Economic Research, Inc.
  10. Campbell, John & Shiller, Robert, 1987. "Cointegration and Tests of Present Value Models," Scholarly Articles 3122490, Harvard University Department of Economics.
  11. Sachs, Jeffrey, 1982. " The Current Account in the Macroeconomic Adjustment Process," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 84(2), pages 147-59.
  12. Agenor, Pierre-Richard & Bismut, Claude & Cashin, Paul & McDermott, C. John, 1999. "Consumption smoothing and the current account: evidence for France, 1970-1996," Journal of International Money and Finance, Elsevier, Elsevier, vol. 18(1), pages 1-12, January.
  13. Otto, Glenn, 1992. "Testing a present-value model of the current account: Evidence from US and Canadian time series," Journal of International Money and Finance, Elsevier, Elsevier, vol. 11(5), pages 414-430, October.
  14. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262150476, December.
  15. David T. Coe & Richard Herd & Marie-Christine Bonnefous, 1987. "International Investment-Income Determination in INTERLINK: Models for 23 OECD Countries and Six Non-OECD Regions," OECD Economics Department Working Papers 45, OECD Publishing.
  16. Pitchford, J. D., 1989. "Optimum borrowing and the current account when there are fluctuations in income," Journal of International Economics, Elsevier, Elsevier, vol. 26(3-4), pages 345-358, May.
  17. Phillips, Peter C B & Hansen, Bruce E, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 57(1), pages 99-125, January.
  18. Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(1), pages 97-125, February.
  19. Ronald I. McKinnon & Huw Pill, 1996. "Credible Liberalizations and International Capital Flows: The “Overborrowing Syndrome”," NBER Chapters, National Bureau of Economic Research, Inc, in: Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 7-50 National Bureau of Economic Research, Inc.
  20. Milbourne, Ross & Otto, Glenn, 1992. "Consumption Smoothing and the Current Account," Australian Economic Papers, Wiley Blackwell, Wiley Blackwell, vol. 31(59), pages 369-84, December.
  21. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195060119, October.
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