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Against the background of the international debt problem which originated with the oil shocks of the seventies, this book undertakes a theoretical analysis of the factors determining aggregate external debt, using the example of a raw material importing country. Instead of the usual static definition of the trade balance as the difference between the value of exports and imports in a single period, here an intertemporal approach is used with a country's current account balance determined as the difference between aggregate saving and aggregate net investment, variables which are primarily dependent on expectations about the future. The analysis is based on microeconomic optimization models which enables individual causal relationships to be presented in a detailed way, the "optimal" size of external debt to be determined and the desirability of an immediate adjustment in the level of debt following an external disturbance to be shown from a welfare point of view.

Inhaltsverzeichnis

Frontmatter

1. Introduction

Abstract
The international debt problem has proved to be one of most intractable of the world’s current economic problems. The extent of the problem had become evident by 1982/83 when some of the most highly indebted countries began having difficulties in servicing their loans1), and the danger of both a complete breakdown in the international debtor/- creditor structure and an imminent world wide financial and economic crisis appeared acute. 2) The payments commitments of the non-oil-developing countries were mainly responsible for this situation. These growing commitments were the result of two factors, on the one hand a large increase in these countries1 external debt, especially at the end of the seventies and the beginning of the eighties, and, on the other, an even more dramatic increase in the burden of interest rates.3) Although the BIS, Central banks and the IMF have, until now, succeeded in their efforts to stabilize the situation, it is certainly not possible to claim that a final solution to the debt problem has been found.
Gerhard Rübel

2. External Debt and the Balance on Current Account

Abstract
When, in a given period, the net increase of an economic unit’s liabilities is greater than the net increase in its claims, then, in that period, the unit’s financial wealth has fallen. Net financial investment is negative in this period and the economic unit’s debtor/creditor position has risen/fallen by the amount of the net financial investment.
Gerhard Rübel

3. The Determinants of External Debt — The Basic Model of a Small Open Economy

Abstract
A small open economy will be used as an example to illustrate the basic structure of an intertemporal analysis of the factors which determine an external debt position.1) The model includes decision making producers and consumers, who base their behaviour on optimizing, microeconomic calculations, and also a government sector.
Gerhard Rübel

4. Non-traded Goods and the Balance on Current Account

Abstract
The first extension of the basic model in chapter 3, will be to add a second production sector to the small raw material importing country. The assumption made so far, namely that the goods price is determined in the world market and cannot be influenced by the country itself, is quite realistic for a traded good and a small country. In all countries, however, there are other, non-traded goods, which frequently make up more than half of the national product, and whose prices are not determined, at least not directly, in the world markets. Every external disturbance, whose influence is, realistically, not exactly the same in the two sectors, will result in internal intersectoral effects.
Gerhard Rübel

5. External Debt in General Equilibrium Models

Abstract
So far, the analysis of the factors determining aggregate external debt has used the example of a small open country which could borrow as much as it wanted from the rest of the world in a perfect world capital market. This country could not influence real world interest rates, the price of the traded goods it produced, or the price of the raw material it imported; from its point of view all these were given in both periods. The effects of a raw material price rise on the rest of the world and the resultant reper-cussions on the country being studied were, however, not considered.
Gerhard Rübel

6. An Extended Planning Horizon

Abstract
The analysis so far has been carried out within a two period planning horizon. The purpose of this was to keep the intertemporal approach as simple as possible and also to highlight the effect linkages that show up in this kind of analysis. The period limitation has, however, the disadvantage that a negative (positive) balance in period 1 requires a corresponding positive (negative) balance in period 2. A current account deficit in period 1, for example, has a corresponding surplus of equal size in period 2. For this reason, the strict two period identities will now be dropped in order to show the modifications to the results of the basic model which come about when the sectors’ planning horizons are extended.
Gerhard Rübel

7. Conclusion

Abstract
Even today, six years after some of the countries with large external debts first experienced payments difficulties, the whole question of international debt remains one of the most difficult problems facing the world economy. Despite strenuous efforts by the IMF, the BIS and the central banks, the dangers arising from individual countries’ long term inability to pay have not been overcome. The consequences for the international financial system cannot be overlooked. Even though they were not the sole cause, it is generally agreed that the two oil shocks of the 1970’ s provided the point of departure for the present situation. It was the sheer size of these shocks that made them a phenomenon unlike any that had previously been experienced.
Gerhard Rübel

Backmatter

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