Front Matter Page
European Department
Table of Contents
Summary
I. Introduction
II. Theoretical Aspects of Net Foreign Asset Equilibrium
III. Empirical Evidence
IV. Conclusions
References
Summary
During the last five years, the United States has been running current account deficits averaging 3 percent of gross national product (GNP), while Japan and the Federal Republic of Germany have recorded surpluses of a similar relative magnitude. These imbalances have resulted in massive swings in net foreign asset positions. Meanwhile, the U.S. public budget deficit has swung sharply into deficit, producing a rising public debt/GNP ratio while, in contrast, Japan and Germany have followed policies to slow down or even reverse the upward movements in their public debt/GNP ratios.
This paper discusses recent research on the interplay between fiscal policies and external imbalances in these major industrial countries, emphasizing the role of stock-flow dynamics in public and foreign deficits and debt. It reviews existing evidence indicating that, in long-run equilibrium, net foreign assets depend on international differences in public debt and demographic factors, and discusses dynamic mechanisms that may operate smoothly to maintain a stable equilibrium and avoid disruptive adjustment. Particular attention is paid to the equilibrating role that may be played by fiscal policies.