Theoretical Background on External Sustainability Assessments
Peer Reviewed
Date issued
Sep 2016
Subject
Net Foreign Asset;
Sustainability Assessment;
Financial Liability;
Export;
GDP Growth;
Oil Price;
Foreign Exchange
JEL code
E01 - Measurement and Data on National Income and Product Accounts and Wealth • Environmental Accounts;
F31 - Foreign Exchange;
F32 - Current Account Adjustment • Short-Term Capital Movements;
F37 - International Finance Forecasting and Simulation: Models and Applications
Category
Technical Notes
This paper explains in detail the external sustainability assessment approach given by the stock-flow relationship between the net external positions, non-income current account plus net capital transfers, and real exchange rate. This approach consists of determining the non-income current account over GDP that would stabilize a benchmark net foreign asset (NFA) position over the medium term, and a "gap" by comparing the NFA-stabilizing non-income current account over GDP with the nonincome current account expected to prevail over the medium term. Additionally, the paper addresses the role of the returns differential in explaining the channels through which the external sustainability adjustment may occur (i. e., trade and financial channels).
