Suppose that a country has negative net foreign assets and adopts a policy of running a...
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Suppose that a country has negative net foreign assets and adopts a policy of running a trade balance surplus sufficient to repay a constant small fraction of the interest due each period, while rolling over the remaining principal and interest. That is, suppose it sets its trade balance according to the rule: TB, ErB: >0 - Answer the following: (a) Using the Current Account identity and the definition of the Trade Balance, show that under this policy, net foreign assets follow the equation: Bs+1 = [1 + (1 - §)r]B (b) Is this policy consistent with the country achieving intertemporal solvency? If not, can you think of a minimum policy that would achieve it (Hint: think of a lower bound for that would prevent the economy from owing all of its future output to creditors)? Suppose that a country has negative net foreign assets and adopts a policy of running a trade balance surplus sufficient to repay a constant small fraction of the interest due each period, while rolling over the remaining principal and interest. That is, suppose it sets its trade balance according to the rule: TB, ErB: >0 - Answer the following: (a) Using the Current Account identity and the definition of the Trade Balance, show that under this policy, net foreign assets follow the equation: Bs+1 = [1 + (1 - §)r]B (b) Is this policy consistent with the country achieving intertemporal solvency? If not, can you think of a minimum policy that would achieve it (Hint: think of a lower bound for that would prevent the economy from owing all of its future output to creditors)?
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Related Book For
Macroeconomics
ISBN: 9780132109994
1st Edition
Authors: Glenn Hubbard, Anthony Patrick O'Brien, Matthew P Rafferty
Posted Date:
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