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ABSTRACT
This paper explores the effects of economic growth and monetary policy on U.S. foreign indebtedness using time-series data for the period 1970-2007. A simultaneous equation model is developed to estimate the effects of economic growth and monetary policy on U.S. foreign borrowing. The results indicate a statistically significant relationship between the stance of monetary policy and foreign indebtedness. The results also suggest a significant positive effect of economic growth on foreign borrowings.
JEL Classification: E52; F32; F43.
Key Words: Foreign indebtedness; monetary policy; current account; economic growth; simultaneity.
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1. INTRODUCTION
The United States was known as the world's largest lender providing funding to enhance economic growth throughout the world during the period following World War II. In fact, by 1981 U.S. net holdings of foreign assets increased to $141 billion. However, U.S. net holdings of foreign assets started to decline since then. Net position became negative by 1987, and the United States turned into a net debtor country for the first time since World War I. The net foreign claims on the United States' output have been rising at an extraordinary pace. For example, in 2007, net domestic investment was 7 percent of GDP, and national saving was only 2 percent of GDP. There was a 5 percent difference between the nation's net domestic investment and saving, which was financed by borrowings from foreigners and consequently, resulted in an increase in the current account deficit. The U.S. current account deficit in each period, by definition, is equal to net U.S. foreign borrowing. As long as the United States runs a large current account deficit, foreign holdings of U.S. assets will increase faster than U.S. holdings of foreign assets. The U.S. current account deficit grew rapidly until the third quarter of 2006 when it peaked at 6.6 percent of GDP. Although the current account deficit began to decrease in 2007 and fell to 3 percent of GDP in 2009, many economists think that this decline in the current account deficit is temporary, and it is caused by the recession. Bertaut et. al. (2008) made projections based on simulations of a detailed model of the U.S. balance of payment that the current account deficit is likely to begin expanding again,...