Trends and effects of external instability

• A persistent CAD leads to:
  • High NPY (net primary income) outflows:
    • causes difficulty in debt repayments
      • can lead to a debt-trap cycle if income doesn’t exceed debt repayments
        • worsening confidence in the economy
          • → lower credit rating
  • Depreciating/volatile exchange rate:
    • may cause imported inflation
    • and the valuation effect on debt
      • (increase increased overall value of debt denominated in $AUD)
  • Increase in interest rates:
    • instability may warrant the government to implement contractionary policy to encourage saving and debt repayments.
      • resulting in reduced consumption, production, & investment
        • constraining economic growth
      • ^^ worth noting that this policy is now considered ineffective, we don’t do this anymore

Pitchford thesis (consenting adults thesis)

• that interacting with international markets allows domestic firms to fund investment
  • which creates employment and development within the economy
• Hence, overseas liabilities are acceptable
  • if they are used to fund investment into industries that create money to pay back the loans

Positive and negative causes and effects