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Feasible Limits For External Deficits And Debt

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Abstract

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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  • Dr Anthony J. Makin, 2003. "Feasible Limits For External Deficits And Debt," Discussion Papers Series 321, School of Economics, University of Queensland, Australia.
  • Handle: RePEc:qld:uq2004:321
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    1. Assaf Razin, 1993. "The Dynamic-Optimizing Approach to the Current Account: Theory and Evidence," NBER Working Papers 4334, National Bureau of Economic Research, Inc.
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    8. Catherine L. Mann, 1999. "Is the U.S. Trade Deficit Sustainable?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 47.
    9. Anthony J. Makin, 2004. "The Current Account, Fiscal Policy, and Medium-Run Income Determination," Contemporary Economic Policy, Western Economic Association International, vol. 22(3), pages 309-317, July.
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    11. 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.).
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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.
    2. Miles Workman, 2015. "Estimating the Cyclically- and Absorption-adjusted Fiscal Balance for New Zealand," Treasury Working Paper Series 15/09, New Zealand Treasury.

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