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  • Feasible Limits for External Deficits and Debt

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    29612.pdf (176.5Kb)
    Author(s)
    Makin, Tony
    Griffith University Author(s)
    Makin, Tony J.
    Year published
    2005
    Metadata
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    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 paper 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 ...
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    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 paper 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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    Journal Title
    Global Economy Journal
    Volume
    5
    Issue
    1
    Publisher URI
    http://www.bepress.com/gej/vol5/iss1/1/
    Copyright Statement
    © 2005 Berkeley Electronic Press. Reproduced in accordance with the copyright policy of the publisher. This journal is available online - use hypertext links.
    Subject
    Applied Economics
    Publication URI
    http://hdl.handle.net/10072/4622
    Collection
    • Journal articles

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