TRADED GOODS, NONTRADED GOODS, AND THE BALANCE OF PAYMENTS: FURTHER REPLY*

In his further comment, EKapur argues that the reformulation of my original model involves an "implausible" stationary state equilibrium condition for the government budget and further that this equilibrium cannot be generated by the model. The purpose of this reply is to show first that not only is my stationary state equilibrium condition feasible, but also that Kapur's alternative formulation involves a misspecification of the stock-flow requirements for a stationary state equilibrium; and, second, that the conditions for the dynamic stability of my revised model are quite easily satisfied. When the government balances its expenditures and receipts by issuing and returning government securities, Kapur has argued that it is inappropriate to specify a stationary state equilibrium in which the stock of government's debt ultimately achieves and maintains a fixed level. Instead, he prefers a stationary state equilibrium in which the stock of government securities (and hence foreign holdings of these securities) continue to grow through time. It is easy to show that this type of equilibrium is possible in only the most trivial of cases. To illustrate this point, let us leave aside the stock problems associated with having