International Finance and Financial Policy

By Hans R. Stoll | Go to book overview
ties should increase given a set of interest rate differentials and an anticipated value for the future spot exchange rate.
3.
If the U.S. economy were not operating at capacity levels, the increase in the U.S. government's borrowing would have a modest impact in leading to a higher level of interest rates on U.S. government securities, for government borrowing would not then be "crowding out" private borrowing. Some elements in this story describe the recent experiences in Great Britain. Demand exceeded domestic productive capacity, as a result of surge in consumer spending, and Great Britain developed a trade deficit.
4.
One statement of the absorption approach--"A trade deficit reflects an excess of consumption (or consumption and investment) over production"--is an identity and hence not falsifiable. The effective comparison is between total spending and productive capacity.
5.
The need for a more contractive fiscal policy should the U.S. trade deficit decline sharply is the symmetric counterpart of the move to a more expansive fiscal policy to neutralize the drag on employment of the increase in the U.S. trade deficit.

REFERENCES

Aliber Robert Z. "The Evolution of the Japanese Trade Surplus." In Kozo Yamamura, ed., Japanese Investment in the United States: Should We Be Concerned. Seattle: Society for Japanese Studies, 1989a.

-----. "U.S. Fiscal Deficits and the Foreign Exchange Value of the U.S. Dollar." In Donald R. Hodgman and Geoffrey E. Wood, eds., Macroeconomic Policy and Economic Interdependence. London: Macmillan, 1989b.

Feldstein Martin S. "The United States in a Global Economy." Hearing before the Committee on Foreign Relations, U.S. Senate, February 28, 1986, 116-118.

Fieleke Norman S., ed. International Payments Imbalances in the 1980s. Federal Reserve Bank of Boston, 1989.

Hutchinson Michael, and Charles Pigott. "Budget Deficits, Exchange Rates, and the Current Account: Theory and U.S. Evidence, 1973-82." Economic Review, Federal Reserve Bank of San Francisco, Autumn 1984.

International Monetary Fund. Report on the World Current Account Discrepancy. Washington, D.C.: 1987.

Johnson Harry G. "Toward A General Theory of the Balance of Payments." In Richard E. Caves and Harry G. Johnson, eds., Readings in International Economics. Homewood, Ill.: Irwin, 1968.

Mundell Robert A. and Alexander K. Swoboda. Monetary Problems of the World Economy. Chicago: University of Chicago Press, 1969.

Peterson Peter G., and Neil Howe. On Borrowed Time. New York: Simon & Schuster, 1988.

Polak J. J. "Monetary Analysis of Income Formation and Payments Problems." In The Monetary Approach to the Balance of Payments. Washington, D.C.: International Monetary Fund, 1977.

Sohmen Egon. "The Assignment Problem." In Robert A. Mundell and Alexander K. Swoboda , eds., Monetary Problems of the World Economy. Chicago: University of Chicago Press, 1969.

Triffin Robert. Europe and the Money Muddle. New Haven, Conn.: Yale University Press, 1969.

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