A Longer Term Perspective on External Adjustment Options

R. Whiteslaw and P. Dempster
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P. Dempster: Office of Economic Planning Advisory Council, Queen Victoria Terrace, ACT

Economic Analysis and Policy, 1990, vol. 20, issue 1, 33-52

Abstract: This paper discusses debt stabilisation paths in a simple supply determined model of the Australian economy. It relates equilibrium debt levels to underlying saving and growth parameters, noting that small changes in these imply large changes in the debt level. Two stylised scenarios for the 1990s are compared: one implies debt stabilisation by the mid to late 1990s, the other assumes a deferral of consumption adjustment and a larger eventual debt. Sensitivity to alternative growth and investment assumptions are considered. If supply side decisions are not independent of debt outcomes, the paper shows that delayed debt adjustment can be unambiguously sub-optimal. A ‘balance of risks’ argument might therefore justify an external balance objective for macro policy.

Date: 1990
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