External Sustainability and Gross Positions: are Brazilian external accounts sustainable?

João Barroso

No 362, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: This paper characterizes external sustainability in the presence of arbitrary gross international positions. The analysis is based on the response of net exports to net foreign liabilities, and is relevant for a growing literature using the same response function approach without any qualification for gross positions. In particular, we propose parametric and nonparametric formal tests for long run sustainability. We also develop a risk assessment methodology for medium run sustainability. We apply the method to the Brazilian economy, also building a new historical data set and a detailed offshore oil scenario which are of independent interest. The empirical results support external solvency and shows relatively well behaved risks of adjustment as judged by the historical experience.

Date: 2014-08
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