Sustainable balance of trade deficits

Abstract

This paper analyzes a model of overlapping generations in which there are two currencies. There are two agents born in each period, and these agents have completely heterogeneous preferences and endowments. The paper shows that there are monetaly equilibria in which one country can sustain a trade deficit whose present value is arbitrarily close to that of its trading partner's entire stream of resources. Hence, there may be no limit to the present value of a country's trade deficit, even if the equilibrium for the world economy satisfies an intertemporal efficiency criterion.

Growth, trade, and international transfers

“…In the context of this paper, it shows that the rates of return (in terms of consumption foregone) of paper assets and of claims against capital are equalized. In earlier work (Fisher, 1990), I showed that these kinds of debt profiles can give rise to arbitrary transfers of resources between countries in exchange economies. have also demonstrated that a positive stock of world debt crowds out real economic investment and slows the economy's underlying growth rate (Fisher, 1993).…”

On exchange rates and efficiency

“…Indeed, in the examples in the last section, there was a unique vector of exchange rates that supported efficient equilibrium allocations. 19 I have shown elsewhere [14] that countries need not have balanced trade in an economy with fixed exchange rates. This paper emphasizes that a system of fixed 17 Here I am obviously using that sin(~t/2) and cos(nt/2) are orthogonal.…”

“…The model here is based upon that developed in Fisher [14], which is in turn an extension of the model developed by Balasko and Shell [5] and [6]. Agents have completely heterogeneous endowments and preferences; hence, agents differ across countries as well as through time.…”

Reproducing the North-South Divide: The Role of Trade Deficits and Capital Flows1

“…Instead, when deficits have been noticed at all, liberal theorists have focused on the capital flows that are thought to balance them 10 . As Eric Fisher (1990:412) puts it, “balance‐of‐payments accounting serves as a tedious reminder that a current account deficit is simply the sum of the capital account surplus and the loss of official reserves.” The conception that trade imbalances could not exist without compensating capital flows is a key linchpin of the equanimity with which liberal theorists view trade deficits. If these capital flows are market transactions in financial assets between willing (income‐maximizing) buyers and sellers, then the judgment of the investors that provide such capital would seem to certify that the imbalances should not be considered worrisome 11…”