Policy Coordination Gives Way to Conflict and Turmoil

Abstract

Do deficits matter? This issue was widely debated in the mid-1980s, when the USA ran large budget and current account deficits (see Fig. 5.1). During the early years of the Reagan administration, investors pretty much ignored the deterioration in the fiscal and external accounts. Most were encouraged that the Federal Reserve was committed to reducing inflation, and they were comforted that the political pendulum was swinging toward market-oriented policies. When Japan displaced the Organization of the Petroleum Exporting Companies (OPEC) as the world’s largest capital exporter, the USA was able to attract capital inflows from abroad on favorable terms.