Criteria of External Sustainability

This paper analyzes the main conceptual issues that arise in assessing external sustainability with a view toward developing operational criteria for the purposes of multilateral surveillance. The main contribution of the analysis is to show how conditional forecasts of external imbalance may be generated in a consistent way that explicitly incorporates a mechanism for achieving sustainability. An index of external unsustainability is also derived that reflects the probability of future changes in policies expected by private agents over time.