Had we used the breathing time that this gave us to address the structural factors and brought the CAD down to its sustainable level, we would have been able to withstand the “taper”. In the event, we did not.
We therefore made ourselves vulnerable to sudden stop and exit of capital flows driven by global sentiment; the eventual cost of adjustment too went up sharply. 32. But what drives the CAD so high? Basic economics tells us that the CAD rises when aggregate demand exceeds aggregate supply.