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Countries whose currencies are not used internationally must adjust or finance in the event of a...

  1. Countries whose currencies are not used internationally must adjust or finance in the event of a deficit in their current account. How can they finance a CA deficit if their assets are of interest to private investors? If their assets are not of interest to private investors?
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Answer #1

When the assets are of their interests, then the central bank of the country, will increase the interest rates on these assets. It will make these assets to be very attractive for the investment purposes and investors will start coming to the country to make investments. It will bring capital inflows to the country and CA deficits can be balanced with the capital account surplus. If the assets are of less or no interest, then the central government can opt for the deficit financing on behalf of the government where the securities will be backed by the guarantee given by the government. It will make investors to come and buy these securities at attractive rates.  It will bring required funds to the government.

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