An analysis of external sustainability in OECD countries using multicointegration techniques

Abstract

This paper analyses the external sustainability of a group of 23 OECD countries during the period 1970-2020. The empirical strategy emphasizes the role of accumulated imbalances in external adjustment, as suggested by Gourinchas and Rey (2007). For this purpose, we test external sustainability in a stock-flow setting using several cointegration and multicointegration tests. The results point towards weak sustainability in the external flows, whereas from the stock-flow perspective, four of the countries would show sustainability at least for part of the sample period after adjustment. Among this group are traditional creditor countries such as New Zealand and Switzerland, as well as debtors (eurozone members). In particular, the debtors are Spain and Portugal, that had relatively restricted access to funding in the international markets during the last financial crisis.

Keywords:

current account, net foreign assets, structural breaks, multicointegration

References

Ahmed, S., & Rogers, J. (1995). Government budget deficits and trade deficits: Are present value constraints satisfied in long-term data? Journal of Monetary Economics, 36(2), 351-374.

Arize, A. C. (2002). Imports and exports in 50 countries: Tests of cointegration and structural breaks. International Review of Economics and Finance, 11(1), 101-115.

Berenguer-Rico, V., & Carrion-i-Silvestre, J. L. (2011). Regime shifts in stock-flow I(2)-I(1) systems: The case of US fiscal sustainability. Journal of Applied Econometrics, 26, 298-321.

Billingsley, P. (1968). Convergence of Probability Measures. John Wiley & Sons, Inc.

Bohn, H. (1995). The sustainability of budget deficits in a stochastic economy. Journal of Money, Credit and Banking, 27(1), 257-271.

Bohn, H. (1998). The behaviour of U. S. public debt and deficits. The Quarterly Journal of Economics, 113(3), 949-963.

Bohn, H. (2007). Are stationary and cointegration restrictions really necessary for the inter-temporal budget constraint? Journal of Monetary Economics, 54(7), 1837-1847.

Camarero, M., Carrion-i Silvestre, J. L., & Tamarit, C. (2013). Global imbalances and the intertemporal external budget constraint: A multicointegration approach. Journal of Banking and Finance, 37(12), 5357-5372.

Camarero, M., Carrion-i Silvestre, J. L., & Tamarit, C. (2015). The Relationship between Debt Level and Fiscal Sustainability in Organization for Economic Cooperation and Development Countries. Economic Inquiry, 53(1), 129-149.

Camarero, M., Sapena, J., & Tamarit, C. (2021). A time-varying estimation of an external reaction function for peripheral EMU countries: the role of risk-aversion and financial openness. Mimeo.

Carrion-i-Silvestre, J. L., Kim, D., & Perron, P. (2009). GLS-based unit root tests with multiple structural breaks both under the null and the alternative hypotheses. Econometric Theory, 25(6), 1754-1792.

Carrion-i-Silvestre, J. L. & Sansó, A. (2006). Testing the null of cointegration with structural breaks. Oxford Bulletin of Economics and Statistics, 68(5), 623-646.

del Barrio, T., Camarero, M., & Tamarit, C. (2015). An analysis of the trade balance for OECD countries using periodic integration and cointegration. Empirical Economics, 49(2), 389-402.

del Barrio, T., Camarero, M., & Tamarit, C. (2019). Testing for Periodic Integration with a Changing Mean. Computational Economics, 54(1), 45-75.

Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74, 427-431.

Durdu, C. B., Mendoza, E. G., & Terrones, M. E. (2010). On the solvency of nations: Are global imbalances consistent with intertemporal budget constraints? (IMF Working Paper nº 50). International Monetary Fund.

Engel, C., & Rogers, J. H. (2009). Expected consumption growth from cross-country surveys: Implications for assessing international capital markets (IMF Staff Papers nº 3). International Monetary Fund.

Engle, R. F., & Granger, C. W. J. (1987). Cointegration and error correction: Representation, estimation, and testing. Econometrica, 55(2), 251-276.

Engle, R. F., & Yoo, S. (1991). Cointegrated economic time series: An overview with new results. In R. F. Engle, & C. W. J. Granger (Eds.), Long-Run Economic Relationships (pp. 237-266). Oxford University Press.

Engsted, T., Gonzalo, J., & Haldrup, N. (1997). Testing for multicointegration. Economics Letters, 56, 259-266.

Escario, R., Gadea, M., & Sabaté, M. (2012). Multicointegration, seigniorage and fiscal sustainability. Spain 1857-2000. Journal of Policy Modeling, 34(2), 270-283.

European Commission. (2012). Focus: The dynamics of intertemporal investment positions. Quarterly Report on the Euro Area, 11(3), 7-20.

Fountas, S., & Wu, J. L. (1999). Are the U. S. current account deficits really sustainable? International Economic Journal, 13(3), 51-58.

Glick, R., & Rogoff, K. (1995). Global versus country-specific productivity shocks and the current account. Journal of Monetary Economics, 36(1), 159-192.

Gourinchas, P. O., & Rey, H. (2007). International financial adjustment. Journal of Political Economy, 115(4), 665-703.

Granger, C. W. J., & Lee, T. H. (1989). Investigation of production, sales and inventory relations using multicointegration and non-symmetric error correction models. Journal of Applied Econometrics, 4(S1), S145-S159.

Granger, C. W. J., & Lee, T. (1990): Multicointegration. In G. F. Rhodes, & T. B. Fomby (Eds.), Advances in Econometrics, vol. 8 (pp. 71-84). JAI Press.

Gregory, A. W., & Hansen, B. E. (1996). Residual-based tests for cointegration in models with regime shifts. Journal of Econometrics, 70(1), 99-126.

Haldrup, N. (1994). The asymptotics of single-equation cointegration regressions with I(1) and I(2) variables. Journal of Econometrics, 63(1), 151-181.

Hamori, S. (2009). The sustainability of trade accounts of the G-7 countries. Applied Economics Letters, 16(17), 1691-1694.

Hansen, B. E. (1992). Testing for parameter instability in regressions with I(1) processes. Journal of Business & Economic Statistics, 10, 321-355.

Herzer, D., & Nowak-Lehmann, F. (2006). Is there a long-run relationship between exports and imports in Chile? Applied Economics Letters, 13(15), 981-986.

Husted, S. (1992). The emerging U. S. current account deficit in the 1980’s: A cointegration analysis. The Review of Economics and Statistics, 74(1), 159-166.

IMF (2005). World Economic Outlook. April 2005. Globalization and External Imbalances. International Monetary Fund.

Irandoust, M., & Ericsson, J. (2004). Are imports and exports cointegrated? An international comparison. Metroeconomica, 55(1), 49-64.

Irandoust, M., & Sjoo, B. (2000). The behavior of the current account in response to unobservable and observable shocks. International Economic Journal, 14(4), 41-57.

Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control, 12(2-3), 231-254.

Johansen, S. (1991). Estimation and hypothesis testing on cointegrating vectors in gaussian vector autoregressive models. Econometrica, 59(6), 1551-1580.

Johansen, S. (1995). Likelihood-Based Inference in Cointegrated Vector Autoregressive Models. Oxford University Press.

Kurozumi, E., & Arai, Y. (2007). Efficient estimation and inference in cointegrating regressions with structural change. Journal of Time Series Analysis, 28(4), 545-575.

Lane, P. R., & Milesi-Ferretti, G. M. (2007). The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004. Journal of International Economics, 73(2), 223-250.

Lane, P. R., & Milesi-Ferretti, G. M. (2018). The External Wealth of Nations Revisited: International Financial Integration in the Aftermath of the Global Financial Crisis. IMF Economic Review, 66(1), 189-222.

Leachman, L. L., & Francis, B. B. (2000). Multicointegration analysis of the sustainability of foreign debt. Journal of Macroeconomics, 22(2), 207-227.

Liu, P., & Tanner, E. (1996). International intertemporal solvency in industrialized countries: Evidence and implications. Southern Economic Journal, 62(3), 739-749.

Milesi-Ferretti, G. M., & Razin, A. (1996). Sustainability of persistent current account deficits (Working Paper nº 5467). National Bureau of Economic Research.

Narayan, P. K., & Narayan, S. (2005). Are exports and imports cointegrated? Evidence from 22 least developed countries. Applied Economics Letters, 12(6), 375-378.

Nason, J. M., & Rogers, J. H. (2006). The present value model of the current account has been rejected: Round up the usual suspects. Journal of International Economics, 68(1), 159-187.

Ng, S., & Perron, P. (1995). Unit root test in arma models with data-dependent methods for the selection of the truncation lag. Journal of the American Statistical Association, 90(429), 268-281.

Ng, S., & Perron, P. (2001). Lag length selection and the construction of unit root tests with good size and power. Econometrica, 69(6), 1519-1554.

Obstfeld, M., & Rogoff, K. (1995). Chapter 34 The Intertemporal Approach to the Current Account. Handbook of International Economics, 3, 1731-1799.

Perron, P. (1989). The great crash, the oil price shock and the unit root hypothesis. Econometrica, 57(6), 1361-1401.

Perron, P. (2006). Dealing with Structural Breaks. Palgrave Handbook of Econometrics, 1(2), 278-352.

Perron, P., & Yabu, T. (2009). Testing for shifts in trend with an integrated or stationary noise component. Journal of Business & Economic Statistics, 27(3), 369-396.

Pesaran, H. M., Shin, Y., & Smith, R. P. (1999). Pooled mean group estimation of dynamic heterogeneous panels. Journal of the American Statistical Association, 94(446), 621-634.

Phillips, P. C. B., & Ouliaris, S. (1990). Asymptotic properties of residual based tests for cointegration. Econometrica, 58(1), 165-193.

Quintos, C. E. (1995). Sustainability of the deficit process with structural shifts. Journal of Business & Economic Statistics, 13(4), 409-418.

Said, S. E., & Dickey, D. A. (1984). Testing for unit root in autoregressive-moving average models of unknown order. Biometrika, 71(3), 599-608.

Shin, Y. (1994). A residual-based test of the null of cointegration against the alternative of no cointegration. Econometric Theory, 10(1), 91-115.

Taylor, A. M. (2002). A century of purchasing-power parity. Review of Economics and Statistics, 84(1), 139-150.

Trehan, B., & Walsh, C. (1991). Testing intertemporal budget constraints: Theory and applications to U. S. federal budget and current account deficits. Journal of Money, Credit and Banking, 23(2), 206-223.

Wickens, M. R., & Uctum, M. (1993). The sustainability of current account deficits: A test of the U. S. intertemporal budget constraint. Journal of Economic Dynamics and Control, 17(3), 423-441.