Assessing the sustainability of external imbalances in the European Union

António Afonso, Florence Huart, João Tovar Jalles, Piotr Stanek

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

We assess the sustainability of the current account (CA) balance, net international investment position (NIIP) and net external debt (NED) in a sample of 22 EU countries using two complementary approaches. First, we employ time-series stationarity tests of current account balance-to-GDP ratios as well as cointegration tests of exports and imports of goods and services. Second, we assess the level of trade balance that stabilises the NIIP and the NED. We find that there is sustainability of the CA balance in eight countries, NIIP in five countries and NED in 10 countries, whereas there is evidence of a lack of sustainability in five debtor nations and three creditor nations. Both approaches are consistent with each other given the relationship between flows and stocks, the existence of structural breaks, and valuation effects via exchange rate and interest rate changes.

Original languageEnglish
Pages (from-to)320-348
JournalWorld Economy
Volume42
Issue number2
DOIs
Publication statusPublished - Feb 2019

Keywords

  • cointegration
  • current account
  • error correction
  • exports
  • imports
  • net foreign assets
  • structural breaks
  • unit roots

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