Sustainability of External Imbalances for 22 Least Developed Countries: An Empirical Investigation
This study empirically examines the sustainability of external imbalances in 22 least developed countries as classified by the World Bank. The study uses the real trade balance series, which captures more precisely the behavior of the external balance. It examines the stationarity of the real trade balance series rather than testing for cointegration between exports and imports. By employing unit root tests with level shifts, it finds that external imbalances in eight of the countries are sustainable. The implications of the findings are that the countries for which the null of unit root is rejected (i) do not violate their international budget constraint; their short-run imbalances are temporary and are sustainable in the long run, and (ii) the macroeconomic policies are effective in causing the exports and imports to converge in the long run.
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Volume (Year): VII (2008)
Issue (Month): 3 (May)
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