Deficits and Surpluses Forever?
For a long time many economists, including notably myself, have predicted that the pattern of large current account deficits and surpluses that emerged in the mid-1980s would prove unfinanceable on a sustained basis. In 1987 this prediction appeared to be coming true. The world’s central banks had to finance a large proportion of the US current account deficit (1), and despite this the dollar fell sharply.
KeywordsExchange Rate Interest Rate Monetary Policy Central Bank Budget Deficit
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- (2).See Stephen Marris: Deficits and the Dollar: the World Economy at Risk, Washington DC, 1987, Institute for International Economics, 1987.Google Scholar
- (3).See Voichi Funabashi: Managing the Dollar: from the Plaza to the Louvre, Washington DC, Institute for international Economics, 1988.Google Scholar
- (8).See Stephen Marris: Deficits and the Dollar: the World Economy at Risk, Washington DC, Institute for International Economics, 1987, pp. 118–22.Google Scholar
- (11).There is, however, currently a question of whether a major mistake may be being made in the management of the EMS. There has been no realignment for 29 months, the longest period since the inception of the EMS. To some extent this appears to be justified by a remarkable convergence in national unit labour costs movements over the last three years. But this has not prevented the emergence of a very large German current account surplus, notably vis-a-vis other European countries. For the time being this has not proved troublesome because for so long as the United States is running a very large deficit the deficits of the other EMS participants have remained relatively small. But if and when the US deficit comes down sharply, correction of the major payments imbalance within Europe could well involve an upward realignment of the DM of a magnitude which could seriously undermine the hard won credibility of the EMS. See Stephen Marris: “Whither the EMS”, Amex Bank Review, April 1989,Google Scholar
- and William R. Cline: United States External Adjustment and the World Economy, Washington DC, Institute for international Economics, May 1989.Google Scholar