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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page On the Solvency of Nations: Are Global Imbalances Consistent with Intertemporal Budget Constraints?
Ceyhun Bora Durdu, Enrique G. Mendoza, and Marco E. Terrones
2009-975  (June 2009)

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.

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Global imbalances, external solvency, debt sustainability, Pooled Mean Group estimation

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