Multicointegration analysis of the sustainability of foreign debt

Using the multicointegration framework suggested by Granger and Lee (1989, 1990) and developed in Engsted, Gonzalo and Haldrup (1997) and Haldrup (199 7) this study explores the long-run relationship between components of the U.S, current account during two periods, 1947:i-1973:iv and 1974:i-1994:ii. The paper develops the concept of sustainability of external imbalances in an environment that is non-deterministic and characterized by uncertainty. The sustainability criteria are related to multicointegration. Evidence co nsistent with sustainable intertemporal external budgeting in the fixed exc hange rate era is presented. In the post Bretton Woods period there is no s upport for sustainable external budgeting. Policy issues and factors that a ffect sustainability are discussed.