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:
Other versions of this item:
- Enrique G. Mendoza & Marco Terrones & Ceyhun Bora Durdu, 2010. "On the Solvency of Nations: Are Global Imbalances Consistent with Intertemporal Budget Constraints?," IMF Working Papers 10/50, International Monetary Fund.
- NEP-ALL-2009-08-30 (All new papers)
- NEP-CBA-2009-08-30 (Central Banking)
- NEP-OPM-2009-08-30 (Open Economy Macroeconomic)
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- Mariam Camarero & Josep Lluís Carrion-i-Silvestre & Cecilio Tamarit, 2013.
"Global imbalances and the Intertemporal External Budget Constraint: A multicointegration approach,"
1303, Department of Applied Economics II, Universidad de Valencia.
- Camarero, Mariam & Carrion-i-Silvestre, Josep Lluís & Tamarit, Cecilio, 2013. "Global imbalances and the intertemporal external budget constraint: A multicointegration approach," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5357-5372.
- Oscar Bajo-Rubio & Carmen Díaz-Roldán & Vicente Esteve, 2013.
"Sustainability of external imbalances in the OECD countries,"
10/13, Instituto Universitario de Análisis Económico y Social.
- 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.
- 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.
- Christian Schoder & Christian R. Proaño & Willi Semmler, 2012. "Are the current account imbalances between EMU countries sustainable?," IMK Working Paper 90-2012, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
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