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Assessing the Sustainability of External Imbalances in the European Union

Antonio Afonso, Florence Huart (), Joao Jalles () and Piotr Stanek ()

No 2017/01, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

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 European Union. (search for similar items in EconPapers)
JEL-codes: C22 C23 F32 F34 F36 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc and nep-eec
Date: 2017-09
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