On the solvency of nations: are global imbalances consistent with intertemporal budget constraints?
AbstractTheory 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 InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 975.
Date of creation: 2009
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-08-30 (All new papers)
- NEP-CBA-2009-08-30 (Central Banking)
- NEP-OPM-2009-08-30 (Open Economy Macroeconomics)
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- Oscar Bajo-Rubio & Carmen Díaz-Roldán & Esteve, 2014.
"Sustainability of external imbalances in the OECD countries,"
Taylor & Francis Journals, vol. 46(4), pages 441-449, February.
- Oscar Bajo-Rubio & Carmen Díaz-Roldán & Vicente Esteve, 2013. "Sustainability of external imbalances in the OECD countries," Working Papers 10/13, Instituto Universitario de Análisis Económico y Social.
- Oscar Bajo-Rubio & Carmen Díaz-Roldán & Vicente Esteve, 2011. "Sustainability of external imbalances in the OECD countries," Working Papers 11-07, Asociación Española de Economía y Finanzas Internacionales.
- Oscar Bajo-Rubio & Carmen Díaz-Roldán & Vicente Esteve, 2012. "Sustainability of external imbalances in the OECD countries," Working Papers 1201, Department of Applied Economics II, Universidad de Valencia.
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