Exercise 6 Consider a country, that we will call Debtor, has a negative NIIP and adopts a

Question:

Exercise 6 Consider a country, that we will call Debtor, has a negative NIIP and adopts a policy to achieve surplus in the trade balance sufficient to pay only a small but constant portion of the debt each period. The remainder of the debt is rolled over. In other words, suppose the country adopts the following rule for its trade balance: TBs 5 2 ξrBs, 0 , ξ , 1.

a. Using the current-account identity and the definition of trade balance, show that, under this policy, the NIIP follows the following equation: Bs11 5 ½1 1 ð1 2 ξÞrBs.

b. Show that the intertemporal budget restriction is satisfied by any ξ . 0.

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer: