Macroeconomic Policy, External Targets and Constraints: The Case of Spain

This paper argues that in the presence of distortions and market imperfections it may be rational for governments to monitor short-run fluctuations of the external account in order to anticipate and therefore avoid difficulties, even though the true external constraint is binding only in the long run. This seems to have been the case in Spain, where macroeconomic policy over the last 20 years has seen a number of clear changes following unfavourable developments in the external accounts. The results of various solvency tests indicate that, in spite of the recent worsening of the current account, the Spanish economy is currently more than complying with its external constraint. However, we warn against complacency in view of the removal of capital controls in the run-up to 1992.