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On the Solvency of Nations: Are Global Imbalances Consistent with Intertemporal Budget Constraints?

Author/Editor: Durdu, Ceyhun Bora | Mendoza, Enrique G. | Terrones, Marco
Authorized for Distribution: February 1, 2010
Electronic Access: Free Full Text (PDF file size is 1,011KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: Theory predicts that a nation's stochastic intertemporal budget constraint is satisfied if net exports (NX) and net foreign assets (NFA) satisfy an error-correction specification with a residual integrated of any finite order. We test this hypothesis using data for 21 industrial and 29 emerging economies for the 1970-2004 period to search for existence of negative relationship between NX and NFA. The results show that, despite the large global imbalances of recent years, NX and NFA positions are consistent with external solvency. 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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Series: Working Paper No. 10/50
Subject(s): Balance of payments positions | Cross country analysis | Current account | Debt sustainability | Developed countries | Economic models | Emerging markets | International financial system | Time series
Author's keyword(s): global imbalances | external solvency | debt sustainability | Poled Mean Group estimation
 
English  
    Published:   February 1, 2010        
            Format:   Paper
    Stock No:   WPIEA2010050   Pages:   39
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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