Research Paper No. 679

INTERNATIONAL CAPITAL FLOWS AND NATIONAL CREDITWORTHINESS: EXAMINING AUSTRALIA'S CURRENT ACCOUNT

by

Paul Cashin & C. John McDermott

March 1999

Department of Economics. University of Melbourne. Parkville Victoria 3052 Australia

ABSTRACT

This paper examines the optimality of international capital flows to a persistent net importer of capital, Australia, during its post-capital-controls period 1984-98. The results suggest that international capital flows were larger than optimal during the 1980s, but in the 1990s such flows have een broadly consistent with those predicted by the consumption-smoothing approach to the determination of the current account. The paper also discusses the main implications arising from measures of optimal capital flows, and compares them with the implications arising from the key concepts used in the determination of national creditworthiness.
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