On the Solvency of Nations: Are Global Imbalances Consistent with Intertemporal Budget Constraints?
Ceyhun Bora Durdu
Federal Reserve Board
Enrique G. Mendoza
University of Maryland - Center for International Economics; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)
Marco E. Terrones
International Monetary Fund (IMF)
June 30, 2009
FRB International Finance Discussion Paper No. 975
Theory 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.
Number of Pages in PDF File: 40
Keywords: global imbalances, external solvency, debt sustainability, Pooled Mean Group estimation
JEL Classification: F41, F32, E66working papers series
Date posted: August 15, 2009
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