Why does a balance of payments deficit for the United States have a different effect on its international rese Best answer on the web

Posted in: darrelrussell.com edit
08 Jan 2009
  • Why does a balance of payments deficit for the United States have a different effect on its international reserves than a balance of payments deficit for the Netherlands?


  • A balance of payments deficit for the US should have no effect on its reserves. The US does not operate to influence the exchange rate. It has a floating exchange rate against all other countries. So the change in reserves is always zero from year to year.



    In contrast, the Netherlands has a fixed exchange rate against all other euro countries. Therefore, its reserves balance must change 1-for-1 with its BOP deficit with France or Germany, for example.



    However, the euro-area has a floating exchange rate against all non-euro countries, so the reserve balance will not be affected by BOP changes with those countries.