Economics debt sustainability approach portfolio balance approach

CFA Level II Economics
#1

Hi,

Can someone explain me what does portfolio balance approach and debt sustainability approach say? I am able to understand flow demand supply channel but not these two.

thanks.

#2

Bump

#3

I’m not sure about the debt suatainabilty model - I too was wondering about it since its in one of the econs mock questions- however the pf balance aproach looks at the impact of fiscal policy on long term government borrowing. It argues that if a government continues to issue debt to raise capital, at some point investors will become sceptical about that government’s abaility to repay that debt, and will eventually stop buying that county’s govvies. When this happens, the reduced FDI will have an affect on the capital account which will lead to depreciation of that country’s currency.

So to summarise- it looks at the long term impact of fiscal policy on exchange rates. High debt levels lead to currency depreciation.

Hope that helps :slight_smile:

Now, can I kindly ask someone to explain to me the flow supply demand model - provided as an answer option in that same question?

thanks!