By Angélique Herzberg

Since the mid-1990s, sustainability of huge and protracted present account positions were attracting a lot cognizance from coverage makers and economists alike. along international imbalances, sustainability of imbalances in the euro quarter, which all started widening presently after the creation of the euro, raised a lot problem. whereas there exists a wide physique of theoretical and empirical literature on sustainability of exterior imbalances, a scientific survey has been missing up to now. Angélique Herzberg fills this hole by way of interpreting a extensive diversity of proven sustainability measures touching on their applicability to a number of the international and intra-euro imbalances of the hot previous. in addition, the writer examines the lifestyles of suggestions results from an economy´s web overseas funding place to its exchange balance.

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Labor is internationally immobile and is supplied inelastically by the RC. Normalizing total labor quantity to unity, the production function reduces to Yt−1 = At−1 F(Kt−1 ). F(·) is strictly increasing in capital and strictly concave (F (K) > 0 and F (K) < 0), and output can only be produced using capital (F(0) = 0). The production function is assumed to satisfy Inada (1964) conditions which state that (i) the marginal product of capital approaches infinity as the capital stock vanishes (limK→0 F (K) = ∞), thus implying that the capital stock is strictly positive, and that (ii) it tends to zero as the capital stock becomes infinitely large (limK→∞ F (K) = 0).

4) is known as single-period budget constraint. 4) are: ‘period-by-period budget constraint,’ ‘static budget constraint’ (because it refers only to one-period), and even ‘dynamic budget constraint’ (because it covers the time period between two dates: the beginning and the end of period t). 4) can also be written as Bt = TBt + (1 + rt )Bt−1 . 5) implies that the RC can repay net foreign liabilities either by generating a trade surplus (T Bt > 0) and/or by borrowing abroad (Bt < 0). 5) are measured in real terms because the typical intertemporal model of the current account is real and assumes, among other things, 7 In contrast, in its weak form, the rational-expectations hypothesis merely implies that agents optimally exploit information available to them for forming their expectations (Fisher, 1980, p.

2010). , β = (1 + r)−1 ). 53) simplifies to Et [u (Yn (hn ) − TBn (hn ))] = Et [u (Yn−1 (hn−1 ) − TBn−1 (hn−1 ))]. 59) that u (Yn (hn ) − TBn (hn )) = u (Yn−1 (hn−1 ) − TBn−1 (hn−1 )). 54) so that the MRS is unity in both cases. , 2002, pp. 23 When the marginal rate of substitution and the trade balance (and possibly also the timepreference rate) are time-varying and non-zero in at least one period, the covariance term will disappear only when the stochastic discount factor from period n (from period t + N + 1) to period t is uncorrelated with the n-period’s trade balance (the t + N + 1-period’s NIIP).

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