An assessment of current account imbalance

Tapio Peura

No 36/1989, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: The seriousness of an external imbalance should be assessed with respect its macroeconomic connections and intertemporal nature. A current account deficit reflects differences in time of saving and investment decicions of the economic agents - the households, the companies and the publie sector - as well as the international dimensions of these decisions, made possible by liberalized capital markets. In principle, respect for intertemporal budget constraints, which bind economic units, will keep foreign indebtedness on an equilibrium path and ensure the solvency of the economy in the long term. Distor~ions relating to the functioning' of markets may, however, lead to sub-optimal consumption and investment decisions and disequilibrium. The rate of growth of foreign indebtedness should be kept within the'limits set by the solvency constraint of the economy, which depends on the real rate of interest on the foreign debt and on the growth rate of the economy.

Date: 1989
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