On the Solvency Of Nations: Are Global Imbalances Consistent With Intertemporal Budget Constraints?

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 errorcorrection specification with a residual integrated of any finite order. The author 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.