On the determination of the external debt: The case of Israel

This paper pursues the econometric implementation of an intertemporal optimization model of the foreign debt with Israeli data. In this model the private sector faces perfect capital markets and maximizes utility from consumption over an infinite horizon. The intertemporal budget constraint recognizes the intertemporal finance equation of the government. Under these conditions the effect of current disturbances (in output, government spending, and unilateral transfers) on private consumption and foreign borrowing is determined by their perceived future persistence. The model passes a formal econometric test. However, some results are also suggestive of omitted considerations.