ABSTRACT
Recent approaches to the balance of payments seek to explain the relation between current and capital account transactions in terms of optimal borrowing and spending. The analysis of the connections between expenditure, borrowing and relative prices in Chapter 3 is an example. With such an approach it is possible to attempt an assessment of the optimal response of the current account and debt to various parametric changes both temporary and permanent, present and future, certain and uncertain. In the present chapter the responses investigated are those of consumers, while Chapter 6 examines systems that explicitly incorporate investment responses. Two propositions pertinent to the current account are demonstrated here. First, the apparently simple notion that borrowing and lending can be beneficial to economic agents is again implicit in the analysis. Put in this form it seems so obvious as to be almost trivial. Put in the form that current account imbalances and foreign indebtedness are often likely to benefit those involved it is not automatically or readily accepted by policy makers and some economists. The other issue investigated is the role of borrowing and lending in helping to offset the effect on consumption and welfare of various types of shocks.
