An econometric evaluation of external debt sustainability in developing countries

This paper introduces and applies a new testing strategy for assessing the sustainability of external debt for a sample of developping countries. Building on one country intertemporal budget constraint, we present alternative definitions of the sustainability property. Retaining a councept of effective net sustainability, we show how this property may be tested as a joint unit root restriction on the joint dynamics of external debt and the current account (or net exports). The gain of power allowed by this approach is illustrated through simulation, and the empirical applications on twelve developping countries result in optimistic conclusions, especially when gross exports are used as normalization variable.