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On the Solvency of Nations: Are Global Imbalances Consistent with Intertemporal Budget Constraints?
Author: Mr. Enrique G. Mendoza, Mr. Marco Terrones, and Ceyhun Bora Durdu
Series:
IMF Working Papers
Volume/Issue:
Volume 2010: Issue 050
Language:
English
Publication Date:
01 Feb 2010
DOI:
https://doi.org/10.5089/9781451963298.001
ISBN:
9781451963298
ISSN:
1018-5941
Pages:
39
Keywords:
WP; null hypothesis; real interest rate; time series
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund