On the solvency of nations: are global imbalances consistent with intertemporal budget constraints?

C. Bora Durdu, Enrique Mendoza and Marco Terrones

No 975, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

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 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-cba and nep-opm
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Working Paper: On the Solvency of Nations: Are Global Imbalances Consistent with Intertemporal Budget Constraints? (2010)
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