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

_IMF Working Papers, February 1, 2010_

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## Bibliographic details
- Authors: Enrique G. Mendoza, Marco Terrones, Ceyhun Bora Durdu
- Published: February 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451963298.001

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### Authors and publication
- By Enrique G. Mendoza, Marco Terrones, Ceyhun Bora Durdu
- February 1, 2010
- IMF Working Papers, Working Paper No. 2010/050
- Volume: 2010; Issue: 050; Pages: 39
- DOI: https://doi.org/10.5089/9781451963298.001
- Stock No: WPIEA2010050
- ISBN: 9781451963298
- ISSN: 1018-5941

### Research question and theoretical framework
- 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.
- The empirical test searches for the existence of a negative relationship between NX and NFA consistent with external solvency.

### Data and sample
- Sample period: 1970-2004
- Countries: 21 industrial and 29 emerging economies

### Empirical method
- Uses an error-correction specification to evaluate the relationship between NX and NFA.
- Employs Pooled Mean Group error-correction estimation to assess homogeneity and statistical significance across countries.

### Key findings
- 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.

### Subject areas and keywords
- Subject: Emerging and frontier financial markets, Financial sector development, Foreign assets, Real interest rates, Solvency
- Keywords: null hypothesis, real interest rate, time series, WP

*IMF Working Paper 2010/050 — "On the Solvency of Nations: Are Global Imbalances Consistent with Intertemporal Budget Constraints?"*

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