Has international borrowing or lending driven Australia’s net capital inflow?
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Over 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.
International Review of Economics and Finance
© 2013 Elsevier Inc. This is the author-manuscript version of this paper. Reproduced in accordance with the copyright policy of the publisher. Please refer to the journal's website for access to the definitive, published version.
International Economics and International Finance