Abstract
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.
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