Sustainability of external imbalances in the OECD countries

Abstract

In this article, we provide a test of the sustainability of external imbalances in the OECD countries over the period 1970 to 2007, i.e., before the beginning of the international financial crisis. Specifically, we deal with the case of those countries that have experienced current account deficits in more than half of the years throughout the period of analysis, and address the recent critique of Bohn (2007) on unit root and cointegration tests of the intertemporal budget constraint.

Keywords:

• external imbalances
• sustainability
• current account
• intertemporal budget constraint

JEL Classification:

• F32
• F41

Acknowledgements

The authors wish to thank three anonymous referees for helpful comments on a previous version.

Funding

Financial support from the Spanish Institute for Fiscal Studies, the Spanish Ministry of Economy and Competitiveness [Projects ECO2011-29314-C02-02 (O. Bajo-Rubio and C. Díaz-Roldán) and ECO2011-30260-C03-01 (V. Esteve)] and the Department of Education and Science of the regional government of Castilla-La Mancha [Project PEII09-0072-7392] is also gratefully acknowledged. V. Esteve also acknowledges support from the Generalitat Valenciana [Project GVPROMETEO2009-098].

Notes

¹ Notice that we are omitting here unilateral transfers, usually a small item in the balance of payments. Alternatively, net exports could be assumed net of transfers.

² Computed as , where is the estimate of ρ in Equation 8, from the second column of Table 4.

³ The role of current account imbalances within a monetary union is discussed at length in Catte (1998).