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On the Solvency of Nations

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Author Info

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

Abstract

Theory predicts that a nation''s stochastic intertemporal budget constraint is satisfied if net exports (NX) and net foreign assets (NFA) satisfy an error-correction specification with a residual integrated of any finite order. We test this hypothesis using data for 21 industrial and 29 emerging economies for the 1970-2004 period to search for existence of negative relationship between NX and NFA. The results show that, despite the large global imbalances of recent years, NX and NFA positions are consistent with external solvency. 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 International Monetary Fund in its series IMF Working Papers with number 10/50.

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Length: 39
Date of creation: 01 Feb 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/50

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Related research

Keywords: Debt sustainability; Balance of payments positions; Developed countries; Economic models; Emerging markets; foreign assets; net foreign assets; equation; statistics; industrial countries; mean group; time series; covariances; samples; standard errors; statistical significance; statistic; foreign asset; standard deviation; cointegration; net foreign asset; stochastic process; polynomial; sample selection; net foreign asset positions; difference equation; mean group estimation; conditional expectation; independent variables; foreign asset positions; significance level; industrial economies; stochastic processes; combination of variables; sample size; significance levels; stationary processes; predictions; investment perspective; stationary process; financial statistics; general equilibrium model; random process; foreign liabilities;

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Cited by:
  1. 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.
  2. 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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