Dynamic benchmarks of external sustainability

Abstract

One approach to external sustainability is based on the idea that external imbalances are sustainable as long as they are the outcome of agents’ optimal decisions (e.g., Edwards, 2007; Blanchard and Milesi-Ferretti, 2009, 2011). An example for external imbalances which are not worrisome are current account surpluses in countries in which the population ages faster than in other countries and which increase their savings in anticipation of the future dissaving once when the number of retirees increases (Blanchard and Milesi-Ferretti, 2009). Another example are current account deficits run by countries which have deeper and more advanced financial markets than other countries and which attract international investors and accumulate foreign liabilities (Mendoza et al., 2007; Caballero et al., 2008a).