Debt and the current account

Abstract

Net external liabilities, particularly net foreign debt, have grown rapidly in both New Zealand and Australia during the 1980s. Some have argued that in the absence of distortions or externalities, continued capital account surpluses are benign since they reflect a willingness by foreigners to finance expenditures by domestic residents. This paper examines the arguments for policy intervention directed towards accumulation of foreign debt. A number of factors, including the supervisory framework in the banking system and policy‐induced sources of country risk, are identified as providing a potential case for change in present policies.

Notes

This is a revised version of an address given to the 1989 Annual General Meeting of the New Zealand Association of Economists. Thanks to John Pitchford, Ted Sieper and two referees for helpful comments.