Some Implications of Inflation Adjustment of Interest Payments on Australia’s Foreign Debt

Interest payments on Australia’s foreign debt are decomposed into real and inflationary components using the Fisher relationship, and the inflation component is treated as an implicit repayment of foreign debt. As a consequence , the size of the current account deficit and capital inflow are reduced by the value of this implicit capital repayment. Il is demonstrated also that the flow of domestic savings is increased by the amount of the implicit capital repayment. Further, the size of these adjustments have increased during the 1980’s , and these increases have probably been more marked in Ausiralia than in many other debtor countries.