The theory of the condenser motor is the operation of a poly-phase motor on a single-phase source. If we consider the current in one phase of a two-phase motor the IR drop is in phase with the current I and the reactance drop is at right angles to it. The voltage OB across the phase is the vector sum of these two.
When a sovereign government decides to default, it recognizes that such an action may have adverse consequences for the domestic economy, specifically for the domestic financial sector. On the other hand, default may improve consumption by reducing repayments to foreign lenders. The optimal decision of the government balances the costs of default against its benefits. This paper focuses on the effect of domestic economic costs of default on optimal government policy. Firstly, the consideration of such costs is important for determining whether or not the government should default, and for deciding the scale of debt repudiation in the event of default. The existence of output costs enables the government to credibly assure foreign lenders that it will repay at least a portion of its debt, and this will enable the government to borrow ex ante. Secondly, the governmentks ex ante debt issuance decision is shaped by its expectations about the costs of default in future periods. If the government can structure its debt issuance policy so as to manipulate the domestic economic costs of default in future periods, it may optimally choose a high level of exposure of the economy to these costs. This enables the government to borrow more ex ante, or to borrow the same amount at lower interest rates.
Evidence from recent default episodes suggests that sovereign default affects the domestic economy. Sturzenegger and Zettelmeyer (2005) report that both domestic and foreign creditors to the government suffer losses on their holdings of government debt in the event of default. De Paoli et al. (2006) record that sovereign default is often associated with substantial output costs for the domestic economy, especially when the default episode is mired in concurrent banking and/or currency crises.
The interrelation between the current account (CA) and capital account (KA), more recently known as the financial accounts, of the balance of payments is a fundamental relation in open economy macroeconomics. The “interdependence” between these component accounts captures the reactions of the financial and real sectors to systemic disturbances and their interaction during the adjustment process (Fausten, 1989-90). These reactions constitute channels for the intersectoral transmission of disturbances, and expose the susceptibility of the domestic nonfinancial sector to developments in international asset markets. Prominent intermediate variables which play a role in this process include income, foreign direct investment, exchange rates, interest rates, and so on. The interrelation between these component accounts of the balance of payments is well known in both the theoretical and empirical literature. But the nature of that interdependent has not been examined intensively.
One issue of particular interest is the simultaneity of the CA and KA. In the limiting case of freely floating exchange rates, CA deficits are financed entirely by KA surpluses and, conversely, net capital flows are “financed”, or transferred, through commensurate imbalances on current account. Formally, the simultaneity of the two component external accounts is captured in the double-entry bookkeeping practice of balance of payments accounting. The economic substance of this phenomenon derives from the fact that voluntary transactions involve exchanges of equivalents – i.e., any sale or purchase involves a quid pro quo. Both equivalents are determined simultaneously and, in the case of cross-border transactions, are recorded in the external accounts.
