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Financial Integration and External Sustainability

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  • Towbin, P.

Abstract

A stable net external position requires that the trade balance responds negatively to changes in the net external position. If financial integration makes financing external imbalances less costly, we expect slower external adjustment in more integrated economies. The study estimates theoretically founded trade balance reaction functions for a panel of seventy countries from 1970-2008. The empirical analysis finds that adjustment in integrated economies is slower. Consistent with the presented theory, the trade balance of integrated economies is more persistent, responds less strongly to net foreign assets, and is more sensitive to fluctuations in net output. Under high integration, the response to the net external position is weak and close to the minimum required to ensure external sustainability.

Suggested Citation

  • Towbin, P., 2012. "Financial Integration and External Sustainability," Working papers 388, Banque de France.
  • Handle: RePEc:bfr:banfra:388
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    References listed on IDEAS

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    Cited by:

    1. Barthélemy, J. & Marx, M., 2012. "Generalizing the Taylor Principle: New Comment," Working papers 403, Banque de France.
    2. Zorell, Nico, 2017. "Large net foreign liabilities of euro area countries," Occasional Paper Series 198, European Central Bank.
    3. João Barata R. B. Barroso, 2014. "External Sustainability and Gross Positions: are Brazilian external accounts sustainable?," Working Papers Series 362, Central Bank of Brazil, Research Department.

    More about this item

    Keywords

    external sustainability; financial integration; reaction function; current account dynamics; net foreign assets.;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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