The paper describes the role of external asset position in evaluating - for the benefit of monetary policy conduct - the risk of imbalance in a country's external payments.

The paper's introductory part presents an overwiev of the key areas of research into factors leading to imbalance in international payments. The overwiev indicates that the research to date has not given sufficient attention to external asset position, especially when trying to determine the excessive level of current account deficit.

The paper interprets a safe external asset position as a situation where, for none of the future periods analyzed the level of external liabilities due or potentially due, measured against short term external assets coupled with new financing opportunities and adjusted for the expected current account change entails a high probability of a rapid slump in external liquidity, leading to an excessive currency depreciation (currency crisis).

Thus a safe external asset position is determined by net international assets and foreign financing capacity plus the expected change in the current account, the limit being set by the imminent risk of liquidity loss or abrupt depreciation. External asset position must therefore be considered in strict relationship with the current account balance. Whether this position is safe or not depends on the current account balance and the ability to affect it, if necessary, without causing a shock.

Sustaining a safe external asset position depends on the liquidity structure of foreign assets and liabilities as their balance. The change in that balance is identical with the current account balance.

The role of the central bank in securing a safe external asset position through influencing the current account is even more crucial in a situation when the currency market fails to verify the level of external financing properly (current account deficit), a situation which poses a threat to the country's international liquidity. The only truly effective instrument at the disposal of the central bank is the monetary policy (exercised through interest rates).

According to the author, in order to curb the current account deficit it would be advisable to conduct a more expansionary monetary policy. In this case, however, the central bank would face a clash between two short-term objectives, namely balanced external payments flows and price stabilization. Assuming that the bank must look towards both these goals, in order to conduct appropriate monetary policy it must know with reasonable certainty when external payments balance is seriously threatened, calling for an adjustment to prevent a currency crisis. This, as mentioned, requires a definition of a safe external asset position.