Sustaining Domestic Budget Deficits in Open

The US economy has in recent years been characterized by growing budget and current account deficits, and by increasing amounts of foreign capital inflows. For the UK, too, the budget deficit remains a central weakness in the economy.With these problems in mind, the author presents a consistent economic framework for analysing the effects and implications of large bond-financed deficits. He uses an open economy-rational expectations model to explore the extent to which government can simply ‘roll over’ debt by issuing more bonds without any help from the monetary authority. He examines the impact of foreign capital on the sustainability of domestic budget deficits, the behaviour of exchange rates, and the possible effects of fiscal and monetary policies. This model is examined in the context of the major economic orthodoxies and their competing stances, and also of American monetary history from Truman to Reagan, including the crash of 1987.Dealing with both domestic and foreign sectors, the book is an important contribution to the understanding of a major problem in macroeconomics.