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Assessing the Sustainability of External Imbalances in the European Union

ISEG Economics Department Working Paper No. WP 10/2017/DE/UECE

47 Pages Posted: 15 Jun 2017  

Antonio Afonso

University of Lisbon - School of Economics and Management; UECE (Research Unit on Complexity and Economics); University of Lisbon - ISEG School of Economics and Management; University of Lisbon - ISEG (School of Economics and Management)

Florence Huart

Université de Lille I

João Tovar Jalles

International Monetary Fund (IMF); Technical University of Lisbon (UTL) - Research Unit on Complexity and Economics (UECE)

Piotr Leszek Stanek

Cracow University of Economics

Date Written: June 14, 2017

Abstract

We assess the sustainability of the current account (CA) balance, net international investment position (NIIP) and net external debt (NED) in a sample of EU countries using two complementary approaches. First, we employ both time-series and panel-data stationarity tests of current account balance-to-GDP ratios as well as cointegration tests of exports and imports of goods and services. Second, we assess the level of trade balance that stabilizes the NIIP and the NED. We find that there is sustainability of the CA balance mainly in a few surplus countries whereas there is more concern about the sustainability of the NIIP or NED in countries with a credit position than in countries with a debit position. Both approaches are consistent with each other given the relationship between flows and stocks, the existence of important structural breaks, and valuation effects via the exchange rate.

Keywords: current account, exports, imports, net foreign assets, unit roots, structural breaks, cointegration, error-correction, cross-sectional dependence

JEL Classification: C22, C23, F32, F34, F36, F41

Suggested Citation

Afonso, Antonio and Huart, Florence and Jalles, João Tovar and Stanek, Piotr Leszek, Assessing the Sustainability of External Imbalances in the European Union (June 14, 2017). ISEG Economics Department Working Paper No. WP 10/2017/DE/UECE . Available at SSRN: https://ssrn.com/abstract=2976061

Antonio Afonso (Contact Author)

University of Lisbon - ISEG (School of Economics and Management) ( email )

R. Miguel Lupi, 20
Lisbon, 1248-078
Portugal
+351 21 392 5985 (Phone)
+351 21 396 6407 (Fax)

HOME PAGE: http://www.iseg.utl.pt/~aafonso/AAWeb.html

University of Lisbon - School of Economics and Management ( email )

Rua do Quelhas, n.º 6
Lisbon, 1200-781
Portugal

UECE (Research Unit on Complexity and Economics)

Rua Miguel Lupi 20
Lisbon, 1249-078
Portugal
+351-213 925 912 (Phone)
+351-213 971 196 (Fax)

HOME PAGE: http://www.iseg.utl.pt/~uece/

University of Lisbon - ISEG School of Economics and Management ( email )

Rua do Quelhas 6
Lisboa, 1200-781
Portugal

Florence Huart

Université de Lille I ( email )

Cité scientifique
Villeneuve d'Ascq Cedex, 59655
France
33 (0)3 20 33 59 98 (Phone)
33 (0)3 20 43 66 55 (Fax)

HOME PAGE: http://florence-huart.univ-lille1.fr/

João Tovar Jalles

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Technical University of Lisbon (UTL) - Research Unit on Complexity and Economics (UECE)

Rua Miguel Lupi, 20
Lisboa, 1200-781
Portugal

Piotr Leszek Stanek

Cracow University of Economics ( email )

ul. Rakowicka 27
Krakow
Poland

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