On the Solvency of Nations: Are Global Imbalances Consistent with Intertemporal Budget Constraints?

40 Pages Posted: 15 Aug 2009

See all articles by Ceyhun Bora Durdu

Ceyhun Bora Durdu

Board of Governors of the Federal Reserve System

Enrique G. Mendoza

National Bureau of Economic Research (NBER); University of Pennsylvania

Marco E. Terrones

International Monetary Fund (IMF)

Date Written: June 30, 2009

Abstract

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.

Keywords: global imbalances, external solvency, debt sustainability, Pooled Mean Group estimation

JEL Classification: F41, F32, E66

Suggested Citation

Durdu, Ceyhun Bora and Mendoza, Enrique G. and Terrones, Marco E., On the Solvency of Nations: Are Global Imbalances Consistent with Intertemporal Budget Constraints? (June 30, 2009). FRB International Finance Discussion Paper No. 975, Available at SSRN: https://ssrn.com/abstract=1452769 or http://dx.doi.org/10.2139/ssrn.1452769

Ceyhun Bora Durdu (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
2024523775 (Phone)

HOME PAGE: http://www.ceyhunbora.com

Enrique G. Mendoza

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

HOME PAGE: http://www.sas.upenn.edu/~egme/index.html

Marco E. Terrones

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-4329 (Phone)

HOME PAGE: http://imf.org/external/np/CV/AuthorCV.aspx?AuthID=171

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