Current account composition and sustainability of external debt (I)
If an economy runs a current account (CA) deficit and finances it via a corresponding net inflow of equity capital (belonging to foreign direct investment (FDI) or to portfolio investment) the external debt (ED) of the country does not change, i.e.: the CA deficit does not add to ED. This is no paradox and simply comes from the definition of CA deficit and external debt. Nonetheless, the implication of this is rather relevant since it points to different degrees of sustainability of CA deficits according to the way they are financed and to the composition of the CA itself. By the evaluation of the determinants of interest rates spreads of a country vis à vis US lending rates we assess the sustainability of CA deficits and we find that the extent of FDI net inflows (proxy of equity capital) allow emerging economies to sustain imbalances which are larger with respect to the case in which the CA deficit is financed by inflows of other more liquid assets. In other words the differential treatment of equity capital as a way of financing the CA, but not contributing to to the ED of a country, is no fiction and affects the solvency assessment of a country. This is a first result of a larger research on the effects of the composition of the CA on the solvency of an economy.
|Date of creation:||2006|
|Contact details of provider:|| Postal: Piazza Scaravilli, 2, and Strada Maggiore, 45, 40125 Bologna|
Phone: +39 051 209 8019 and 2600
Fax: +39 051 209 8040 and 2664
Web page: http://www.dse.unibo.it
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Philip R. Lane & G Milesi-Feretti, 2004.
"Financial Globalization and Exchange Rates,"
CEP Discussion Papers
dp0662, Centre for Economic Performance, LSE.
- Philip R. Lane & Gian Maria Milesi-Ferretti, 2005. "Financial Globalisation and Exchange Rates," The Institute for International Integration Studies Discussion Paper Series iiisdp044, IIIS.
- Gian M Milesi-Ferretti & Philip R. Lane, 2005. "Financial Globalization and Exchange Rates," IMF Working Papers 05/3, International Monetary Fund.
- Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2004. "Financial Globalization and Exchange Rates," CEPR Discussion Papers 4745, C.E.P.R. Discussion Papers.
- Philip R. Lane & Gian Maria Milesi-Ferretti, 2004. "Financial globalization and exchange rates," LSE Research Online Documents on Economics 19926, London School of Economics and Political Science, LSE Library.
- G. Rossini & P. Zanghieri, 2003. "A simple test of the role of foreign direct investment in the Feldstein- Horioka puzzle," Applied Economics Letters, Taylor & Francis Journals, vol. 10(1), pages 39-41.
- Buiter, Willem H. & Sibert, Anne, 2005. "How the Eurosystem’s Treatment of Collateral in its Open Market Operations Weakens Fiscal Discipline in the Eurozone (and what to do about it)," CEPR Discussion Papers 5387, C.E.P.R. Discussion Papers.
- Lane, Philip R, 2005.
"Global Bond Portfolios and EMU,"
654, University Library of Munich, Germany, revised 15 Feb 2006.
- Lane, Philip R., 2005. "Global bond portfolios and EMU," Working Paper Series 0553, European Central Bank.
- Philip R. Lane, 2006. "Global Bond Portfolios and EMU," The Institute for International Integration Studies Discussion Paper Series iiisdp168, IIIS.
- Swart R. Ghosh & Atish R. Ghosh, 2002.
"Structural Vulnerabilities and Currency Crises,"
IMF Working Papers
02/9, International Monetary Fund.
- Axel Schimmelpfennig & Nouriel Roubini & Paolo Manasse, 2003. "Predicting Sovereign Debt Crises," IMF Working Papers 03/221, International Monetary Fund.
- Milesi-Ferretti, G-M & Razin, A, 1996.
Princeton Studies in International Economics
81, International Economics Section, Departement of Economics Princeton University,.
- Milesi-Ferreti, Gian Maria & Razin, Assaf, 1996. "Current account sustainability," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34294, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
- Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, March.
- Hong G. Min, 1998. "Determinants of emerging market bond spread : do economic fundamentals matter?," Policy Research Working Paper Series 1899, The World Bank.
When requesting a correction, please mention this item's handle: RePEc:bol:bodewp:568. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dipartimento Scienze Economiche, Universita' di Bologna)
If references are entirely missing, you can add them using this form.