The (Un)Sustainability of the U.S. International Debt Position : Do Not Rely Too Much on Valuation Effects

In this paper, I claim that there are sound theoretical and empirical reasons to believe that the valuation channel is unimportant for the sustainability of the American international debt, in spite of the role it plays in the adjustment dynamics of the external imbalances. First, I observe that the theoretical relevance of the valuation channel does not pertain to stochastic general equilibrium models; it emerges only in deterministic or linearized setups. Then, I use a Bayesian VAR to confirm the different theoretical predictions of the two types of models. My final results restore the traditional primary role of the trade channel for the sustainability of debt