Must-Read: Brad Setser: What To Do When Countries With Fiscal Space Won’t Use It?

Must-Read: Brad Setser: What To Do When Countries With Fiscal Space Won’t Use It?:

Fiscal policy alone doesn’t determine the current account….

And, well, a significant share of many countries’ current account is now coming from investment income earned abroad, and that can fluctuate in strange ways. But there is a potential adding-up issue if all the large surplus economies in East Asia deliver on their planned fiscal consolidations. The first order impact of fiscal consolidation in all three should be a bigger external surplus in all three. By forecasting that away, the IMF runs the risk of understating the drag fiscal consolidation in East Asia might pose to global demand.