EXTERNAL STABILITY
Definition: External stability is an aim of government policy that seeks to promote sustainability on the external accounts so that Australia can service its foreign liabilities in the medium to long term and avoid currency volatility. External stability indicators include the CAD, foreign liabilities and the exchange rate.
Measurement, Trends and Current Statistic
External stability is measured through an analysis of CAD as a % of GDP, net foreign debt as a % of GDP and fluctuations in the exchange rate. Instability arises when CAD exceeds 3-4% of GDP, net foreign debt is above 40% of GDP and the exchange rate is volatile. Historically Australia’s CAD has fluctuated between 3-6% of GDP and is currently 3.2%. Some economists …show more content…
While the RBA and Treasury continue to monitor Australia’s CAD, foreign liabilities and exchange rate, the aim of improving external stability is not a major influence on fiscal or monetary policy. This reflects a widespread acceptance of Pitchford’s ‘consenting adults’ view of the current account among economists and policy makers. External stability issues are primarily addressed through Australia’s long-term policy settings, which aim to reduce the risk of external shocks compromising financial markets. Fiscal policy has had a role in addressing Australia’s historically low level of national savings. Through fiscal consolidation and the implementation of a national compulsory superannuation scheme the government has sought to ensure Australia is able to fund investment projects internally rather than through borrowing from foreign investors. Fiscal consolidation is based on the ‘Twin Deficits Hypothesis,’ which suggests that an increase in the budget deficit causes an increase in CAD. This occurs because increased government expenditure results in rising demand pull inflation for non-tradable goods and services. This reduces international competitiveness and indirectly contributes to a rising CAD by increasing demand for cheaper tradable imports. Thus, reducing Australia’s CAD involves a contractionary fiscal policy stance to improve Australia’s international competitiveness. In addition, the government can improve competitiveness by reducing capacity constraints, alleviating skills shortages, removing protectionist barriers, investing in infrastructure development programs and introducing labor market reforms to increase productivity and workforce participation. Overall, government policy has supported external stability as the Australian economy has achieved 23 years of consecutive growth, currency volatility has been minimal and Australia’s triple AAA credit rating has
Definition: External stability is an aim of government policy that seeks to promote sustainability on the external accounts so that Australia can service its foreign liabilities in the medium to long term and avoid currency volatility. External stability indicators include the CAD, foreign liabilities and the exchange rate.
Measurement, Trends and Current Statistic
External stability is measured through an analysis of CAD as a % of GDP, net foreign debt as a % of GDP and fluctuations in the exchange rate. Instability arises when CAD exceeds 3-4% of GDP, net foreign debt is above 40% of GDP and the exchange rate is volatile. Historically Australia’s CAD has fluctuated between 3-6% of GDP and is currently 3.2%. Some economists …show more content…
While the RBA and Treasury continue to monitor Australia’s CAD, foreign liabilities and exchange rate, the aim of improving external stability is not a major influence on fiscal or monetary policy. This reflects a widespread acceptance of Pitchford’s ‘consenting adults’ view of the current account among economists and policy makers. External stability issues are primarily addressed through Australia’s long-term policy settings, which aim to reduce the risk of external shocks compromising financial markets. Fiscal policy has had a role in addressing Australia’s historically low level of national savings. Through fiscal consolidation and the implementation of a national compulsory superannuation scheme the government has sought to ensure Australia is able to fund investment projects internally rather than through borrowing from foreign investors. Fiscal consolidation is based on the ‘Twin Deficits Hypothesis,’ which suggests that an increase in the budget deficit causes an increase in CAD. This occurs because increased government expenditure results in rising demand pull inflation for non-tradable goods and services. This reduces international competitiveness and indirectly contributes to a rising CAD by increasing demand for cheaper tradable imports. Thus, reducing Australia’s CAD involves a contractionary fiscal policy stance to improve Australia’s international competitiveness. In addition, the government can improve competitiveness by reducing capacity constraints, alleviating skills shortages, removing protectionist barriers, investing in infrastructure development programs and introducing labor market reforms to increase productivity and workforce participation. Overall, government policy has supported external stability as the Australian economy has achieved 23 years of consecutive growth, currency volatility has been minimal and Australia’s triple AAA credit rating has