Week 2 Current Account Sustainability Flashcards
Can a country run a perpetual Trade balance deficit?
Depends on the position of a country. If a country is a net debtor (NIIP is -ve) then it won’t be able to run a trade balance deficit. If a country is a net creditor it can run a trade balance deficit as it can use the interest generated by its investments abroad to finance the deficit.
What is the net foreign asset position including interest equal to?
Net Foreign asset position including interest (1+r)B*o=-TB1/- TB2/1+r
If B*<0 (>0) what does this mean for trade balance in the future?
If Bo is less than 0 it means a country cannot run a negative trade balance as that will lead to a -(-)=+ and therefore the equation wouldn’t hold. If Bo is >0 it means a country can afford to run a deficit in the future.
Can a country run a perpetual Current account deficit?
Similarly depends on the net foreign asset position of a country. The 2 period model shows B*o=-CA1-CA2. This shows that a country can run a CA deficits in both periods only if the initial net asset position is positive.
How are Savings, Investment and the Current account linked?
CA=S-I, this shows that any savings of excess of the current account must be allocated to purchasing foreign assets.
What are the 4 ways of viewing the current account?
- CA=S-I
- CA=TB1+rB*o
- CA=B1-Bo= Change in NIIP
- Change in NIIP= CA + Valuation changes
Explain the No-Ponzi game condition
lim BT ≥ 0. The No Ponzi game constraint shows that a country will have to initially pay off its debt. This is because it argues that the debt of a country must grow at a rate less than the interest rate . This will lead to the numerator ( growth rate of debt) growing at a rate smaller than the interest rate. If the overall debt of a country grows at a rate faster than the interest the country will never be in a position to finance its debt and the debt will roll on forever.
Explain the optimality condition
The mirror image of the no Ponzi game condition. You do not want a country whose a net creditor with the R.O.W to have credit owed to them which is growing at a rate faster than in the interest rate. This will mean the country receiving the money will never be in a position where they can afford to pay you back.
Explain how the no Ponzi game condition and the optimality game condition lead to the transversality condition
To satisfy both condition Lim Bt must =0.
How can a country run a never ending current account deficit?
If it has a positive net foreign asset position
