Abstract
In this cornerstone chapter, the vitally important National Savings Identity (NSI), linking trade and budget balances to global capital flows, interest rates, and exchange rates, makes its first appearance. In many ways, this chapter, linking the “twin deficits” in a fundamentally intuitive manner, sets the tone for macroeconomic policies to be discussed in following chapters.
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Notes
- 1.
Some examples of budget deficits are the US budget deficits of the mid-1980s and since 9/11, the Japanese and Belgian budget deficits of the early 2000s. Examples of surpluses are the US surpluses of the late 1990s to 2001, as well as the national balances of most Southeast Asian countries in the late-1990s to the early 2000s.
- 2.
The current account balance is reported only quarterly unlike the monthly trade balance because services are often intangibles and take time to record accurately. Services do not pass through customs, are harder to measure, and are not reported as frequently as goods crossing international borders.
- 3.
The steps are purely for the purpose of pedagogic intuition. They loosely follow the direction of causality from budget deficits to current account deficits for one particular borrowing cycle.
- 4.
These are ‘real’ or inflation-adjusted interest rates. At this point, given no monetization, we assume that the interest rates are indeed real rates. This will be discussed in detail while covering nominal and real rates in Chap. 6.
- 5.
Seminal work in the area of budget deficit sustainability was done by Sargent and Wallace in their influential ‘Some Unpleasant Monetarist Arithmetic’, Federal Reserve Bank of Minneapolis Quarterly Review, Winter 1985.
- 6.
The huge generalization made here is only for the purposes of highlighting polar extremes of NSI applications.
- 7.
One factor was the pegging (or quasi-pegging) of Southeast Asian exchange rates.
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Langdana, F.K. (2016). Budget Deficits, Trade Deficits, and Global Capital Flows: The National Savings Identity. In: Macroeconomic Policy. Springer Texts in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-32854-6_3
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DOI: https://doi.org/10.1007/978-3-319-32854-6_3
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