australia current account
external deficits, and the place of the consumption-smoothing approach within that literature. In an advance on previous work, the econometric
analysis reported in this paper uses techniques (Phillips-Hansen FM estimator) for the estimation of cointegrating vectors which are robust in the presence of serial
correlation and endogeneity. This is important as empirical estimation of the consumption-smoothing model is likely to occur in the presence of endogeneity and
serial correlation. Finally, drawing on the discussion of the sustainability of external deficits, calculations are provided to determine what change in net national
savings is required for Australia to satisfy its external borrowing constraint.
The remainder of the paper is organized as follows. In Section II we review some general benchmarks of external liabilities and the servicing of these liabilities,
such as: the ratio of net external liabilities to exports; the cost of servicing liabilities as a share of exports; and the current account deficit as a share of exports.
While these benchmarks are arbitrary, they are useful in placing Australia on the OECD spectrum marked by Mexico and Japan as extreme cases. In Section III
we present an intertemporal model that is essential in discussing whether current account deficits are excessive. The econometric methods used to estimate this
intertemporal model are summarized in Section IV, and the results of the estimation, as well as an analysis of whether Australia satisfies its external borrowing
constraint, are set out in Section V. Section VI contains some concluding comments.
II Conditions for Sustainable International
Indebtedness
The problem of determining a sustainable level for the current account balance is one involving the allocation of real resources over time. For example, if an
increment to net foreign liabilities adds more to net investment payments than to the capacity to make such payments, then future net exports must be generated. If
they are not, and conditions do not change, then external debt will grow faster than debt service capacity. For this to be avoided, the real interest paid on
additional debt must grow at a rate less than or equal to the rate of growth of exports. This suggests that a condition of sustainable international indebtedness
could be that the real rate of interest on national debt be less than the rate of growth of export receipts. Similar conditions could be based on the rate of output
growth or the rate of growth of output per capita. Such conditions imply that running a zero current account balance will yield a declining debt to real resource
ratio, and consequently a long-run current account balance given any level of initial indebtedness.5
Moore (1990) provides several debt ratios used by international banks in making country risk assessments, to ascertain when a country can be regarded as
having overborrowed. He argues that `danger points' are reached when, as a percentage of the exports of goods and services: [next page]