Current Account Imbalances: A New Approach to Assess External Debt Sustainability

30 Pages Posted: 28 Sep 2015

See all articles by Willi Semmler

Willi Semmler

The New School - Department of Economics; Universitaet Bielefeld; IIASA

Ibrahim Tahri

The New School - Department of Economics

Date Written: June 1, 2015

Abstract

The aim of this paper is to analyze the external debt of three euro area economies, Italy, Spain, and Germany. To study the effect of debt on the investment-consumption dynamics in those countries, we first discuss the causes, sources, and adjustment processes of current account deficits in industrialized economies, with a particular focus on the Eurozone member states. We then introduce new empirical measures of sustainability. Instead of using the common measure of external debt over GDP, we use debt over assets. To study the dynamics of external debt sustainability we use an intertemporal model of finite time horizon, which we numerically solve through the method of Non-linear Model Predictive Control (NMPC) method. Using our numerical solution method, we provide a calibration of the external debt sustainability for Italy, Spain, and Germany. In the calibration of our model for those countries we also measure sustainability by the debt to asset ratio and show that the periphery economies moved toward a slow moving debt crisis, whereas Germany moved into a stable environment. Yet, the latter is likely to be affected by the former in the long run.

Keywords: External debt, Current Account Imbalances, Debt sustainability, Public/Private wealth, NMPC, Intertemporal model

JEL Classification: E21

Suggested Citation

Semmler, Willi and Tahri, Ibrahim, Current Account Imbalances: A New Approach to Assess External Debt Sustainability (June 1, 2015). Available at SSRN: https://ssrn.com/abstract=2666131 or http://dx.doi.org/10.2139/ssrn.2666131

Willi Semmler

The New School - Department of Economics ( email )

65 Fifth Avenue
New York, NY 10003
United States

HOME PAGE: http://www.newschool.edu/nssr/faculty/?id=4e54-6b79-4e41-3d3d

Universitaet Bielefeld ( email )

Universit├Ątsstra├če 25
Bielefeld, NRW
Germany

IIASA ( email )

Schlossplatz 1
Laxenburg/Austria, A-2361
Austria

Ibrahim Tahri (Contact Author)

The New School - Department of Economics ( email )

Room 1116
6 East 16th Street
New York, NY 10003
United States

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