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Feasible Limits For External Deficits And Debt

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Rising current account deficits and foreign debt levels remain a source of concern for international financial markets and policymakers. Yet, exactly what constitutes an "excessive" external deficit or liability position for an economy at any time has not been adequately defined. This paper addresses this question by proposing measures of the maximum feasible limits of current account deficits and foreign debt levels based on international macroeconomic relationships. It proposes that investment opportunities essentially define the limit of feasibility for current account deficits, whereas the capital to output ratio sets the feasible foreign debt to GDP limit. Benchmark estimates of these limits are presented for advanced economies that have borrowed heavily since 1990.

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Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 321.

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Date of creation: 2003
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Handle: RePEc:qld:uq2004:321

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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. 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.).
  3. Milesi-Ferretti, G-M & Razin, A, 1996. "Current-Account Sustainability," Princeton Studies in International Economics 81, International Economics Section, Departement of Economics Princeton University,.
  4. 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.
  5. Catherine L. Mann, 1999. "Is the U.S. Trade Deficit Sustainable?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 47.
  6. Catherine A. Pattillo & Andrew Berg, 1998. "Are Currency Crises Predictable? A Test," IMF Working Papers 98/154, International Monetary Fund.
  7. Razin, A., 1993. "The Dynamic-Optimizing Approach to the Current Account: Theory and Evidence," Papers 2-93, Tel Aviv - the Sackler Institute of Economic Studies.
  8. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
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Cited by:
  1. Anthony Makin & Wei Zhang & Grant Scobie, 2008. "The Contribution of Foreign Borrowing to the New Zealand Economy," Treasury Working Paper Series 08/03, New Zealand Treasury.

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