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

40 Pages Posted: 2 Mar 2010

See all articles by Ceyhun Bora Durdu

Ceyhun Bora Durdu

Board of Governors of the Federal Reserve System

Marco E. Terrones

International Monetary Fund (IMF)

Enrique G. Mendoza

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

Date Written: February 2010

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.

Keywords: Balance of payments positions, Cross country analysis, Current account, Debt sustainability, Developed countries, Economic models, Emerging markets, International financial system, Time series

Suggested Citation

Durdu, Ceyhun Bora and Terrones, Marco E. and Mendoza, Enrique G., On the Solvency of Nations: Are Global Imbalances Consistent with Intertemporal Budget Constraints? (February 2010). IMF Working Papers, Vol. , pp. 1-39, 2010. Available at SSRN: https://ssrn.com/abstract=1562418

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

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

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

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