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On the solvency of nations: are global imbalances consistent with intertemporal budget constraints?

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Author Info

  • Ceyhun Bora Durdu
  • Enrique G. Mendoza
  • Marco E. Terrones

Abstract

Theory predicts that a nation's stochastic intertemporal budget constraint is satisfied if net foreign assets (NFA) are integrated of any finite order, or if net exports (NX) and NFA satisfy an error-correction specification with a residual integrated of any finite order. We test these conditions using data for 21 industrial and 29 emerging economies for the 1970-2004 period. The results show that, despite the large global imbalances of recent years, NFA and NX positions are consistent with external solvency. Country-specific unit root tests on NFA-GDP ratios suggest that nearly all of them are integrated of order 1. Pooled Mean Group error-correction estimation yields evidence of a statistically significant, negative response of the NX-GDP ratio to the NFA-GDP ratio that is largely homogeneous across countries.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 975.

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Date of creation: 2009
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Handle: RePEc:fip:fedgif:975

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Related research

Keywords: Balance of payments ; Budget deficits ; Debts; External;

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Cited by:
  1. Oscar Bajo-Rubio & Carmen Díaz-Roldán & Esteve, 2014. "Sustainability of external imbalances in the OECD countries," Applied Economics, Taylor & Francis Journals, vol. 46(4), pages 441-449, February.

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