Davies, Ronald B.Shea, Paul, 1977-2007-02-212007-02-212006-07-31https://hdl.handle.net/1794/388239 p.This paper develops a simple two-country, two-good model of international trade and borrowing that suppresses all previous sources of current account dynamics. Under rational expectations, international debt follows a random walk. Under adaptive learning however, international debt behaves like either a stationary or an explosive process. Whether debt converges or diverges depends on the model’s exact specification and the specific learning algorithm that agents employ. When debt diverges, a financial crisis eventually occurs to ensure that the model’s transversality condition holds. Such a financial crisis causes an abrupt decrease in the debtor country’s consumption and utility.255087 bytesapplication/pdfen-USCurrent accountInternational debt movementsExpectationsAdaptive learningWorking Paper