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| This has led to consideration of a broad concept of "national liquidity", though the relevance of a national balance sheet for policy purposes is controversial. |
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| One polar view is that the external deficits and debt that are the result of decisions of the private sector - and not due to government borrowing - are of little concern to policymakers. |
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| Such a view may be taken by industrial countries since their access to international liquidity at zero risk spreads is normally assured. |
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| However, for emerging economies there are some arguments in favour of national balance sheet and national liquidity. |
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| Large net borrowings by some entities in the economy tend to increase country risk premiumsd thus raise the interest rate charged to all borrowers. |
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| One solution that has been suggested to counter any such externalities would be to internalise them through some form of tax on foreign borrowing or to impose some controls. |
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| Furthermore, the exchange rate would overshoot if a country's access to capital markets dried up and it were suddenly forced to repay its foreign currency obligations, and this would cause a deep recession. |
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| Private sector external debt decisions have, in fact, impinged on fiscal management and balance sheets of official sector in several ways in the context of recent crises. |
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| Thus, an important policy aspect is the question of whether and how the official sector should take account of the maturity and currency mismatches of the private sector in structuring its own foreign assets and liabilities. |
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| The concept of a national balance sheet, of course, raises several tricky questions relating to private sector foreign assets offsetting liabilities, and the extent to which their foreign exchange exposures fully capture vulnerability. |
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| In spite of all these complexities that are involved in the national balance sheet approach, there is merit in exploring such an approach to provide guidance to policy relating to reserves, both in terms of adequacy and management. |
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