Financial interdependence and external adjustment: some problems posed by US Federal government indebtedness

  • Joseph Bisignano
Part of the Financial And Monetary Policy Studies book series (FMPS, volume 17)


The currently most popular paradigm explaining the state of international payments imbalances rests heavily on the argument that the source of the problem is the US fiscal deficit and the deficiency of private US saving. Nobel laureate James Tobin has recently written, “The moral is this: substantial reduction of the federal deficit is an essential part of the ultimate solution, just as it was a major initial source of the problem”.1 Similarly, Professor Paul Krugman has concluded, “fiscal imbalances contributed to the widening of external imbalances in the 1980s, and fiscal policy can contribute to narrowing these imbalances”.2 These sentiments are echoed by a large body of the academic community and the financial press.


Exchange Rate Interest Rate Central Bank Fiscal Policy Real Exchange Rate 
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  1. 1.
    James Tobin, “Are there reliable adjustment mechanisms?”, Bank of Japan Monetary and Economic Studies, September 1987.Google Scholar
  2. 2.
    Paul Krugman, “Adjustment in the World Economy”, Occasional Paper 24, Group of Thirty, October 1987.Google Scholar
  3. 3.
    Lawrence Summers and Chris Carroll, “Why is US national saving so low?”, Brookings Papers on economic activity, 2,1987.Google Scholar
  4. 4.
    Jacob A. Frenkel and Carlos A. Rodriguez, “Exchange rate dynamics and the overshooting hypothesis”, International Monetary Fund, Staff papers March 1982.Google Scholar
  5. 5.
    See Jürg Niehans, International Monetary Economics, The Johns Hopkins University Press, 1984, p. 218.Google Scholar
  6. 6.
    See J. A. Bispham, “Rising public-sector indebtedness: some more unpleasant arithmetic” in Private saving and public debt, edited by M. J. Boskin, J. S. Flemming and S. Gorini, Basil Blackwell, 1987.Google Scholar
  7. 7.
    See P. J. K. Kouri and J.B. de Macedo, “Exchange rates and the international adjustment process”, Brookings Papers on Economic Activity, No. 1,1978.Google Scholar
  8. 8.
    See. N. Sargen, K. Schoenholtz and B. Alcamo, “Japanese bond market volatility and international capital flows”, Salomon Brothers Inc., August 1987.Google Scholar
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    See R. J. Shiller, “The volatility of long-term interest rates and expectations models of the term structure”, Journal of Political Economy, December 1979.Google Scholar
  10. 10.
    Thomas J. Sargent and Neil Wallace, “Some unpleasant monetarist arithmetic”, Federal Reserve Bank of Minneapolis Economic Review, autumn 1981.Google Scholar
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    See, for example, Peter R. Hartley, “Rational expectations and the foreign exchange market”, in Exchange rates and international macro-economics, Jacob A. Frenkel, editor, 1983.Google Scholar
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    See Martin S. Feldstein, “The budget deficit and the dollar”, in NBER Macroeconomics Annual 1986, The MIT Press, 1986.Google Scholar
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    Scepticism that fiscal expansion would lead to currency appreciation in the UK case is expressed in C. Goodhart, “Exchange rate economics 1986: a comment”, The Economic Journal, March 1987.Google Scholar
  14. 14.
    Regarding the diminished ability to use fiscal policy for cyclical stabilisation, see “Fiscal and monetary actions will be limited by heavy debt”, The Wall Street Journal, 19 February 1988.Google Scholar
  15. 15.
    Quoted from “Reaganomics” by Olivier Jean Blanchard, Economic Policy, October 1987.Google Scholar
  16. 16.
    SeeR. Dornbusch reference above.205Google Scholar
  17. 17.
    Some argue that the international integration of capital markets should lead one to expect considerable short-run volatility in exchange rates. See Maurice Obstfeld, “Floating exchange rates: experience and prospects”, Brookings Papers on Economic Activity, 2,1985.Google Scholar
  18. 18.
    “Prospects for financial markets in 1988”, Salomon Brothers Inc., p. 50. sGoogle Scholar

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© Kluwer Academic Publishers 1989

Authors and Affiliations

  • Joseph Bisignano

There are no affiliations available

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