Working Paper
On the solvency of nations: are global imbalances consistent with intertemporal budget constraints?
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: Balance of payments; Budget deficits; Debts, External;
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Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: International Finance Discussion Papers
Publication Date: 2009
Number: 975