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Assessing the Sustainability of External Imbalances in the European Union

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

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 EU countries using two complementary approaches. First, we employ both time-series and panel-data 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 stabilizes the NIIP and the NED. We find that there is sustainability of the CA balance mainly in a few surplus countries whereas there is more concern about the sustainability of the NIIP or NED in countries with a credit position than in countries with a debit position. Both approaches are consistent with each other given the relationship between flows and stocks, the existence of important structural breaks, and valuation effects via the exchange rate. Key Words : current account, exports, imports, net foreign assets, unit roots, structural breaks, cointegration, error-correction, cross-sectional dependence.

Suggested Citation

  • António Afonso & Florence Huart & João Tovar Jalles & Piotr Stanek, 2017. "Assessing the Sustainability of External Imbalances in the European Union," Working Papers Department of Economics 2017/10, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
  • Handle: RePEc:ise:isegwp:wp102017
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    8. António Afonso & Florence Huart & João Tovar Jalles & Piotr Stanek, 2020. "Long-run relationship between exports and imports: current account sustainability tests for the EU," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 19(2), pages 155-170, May.
    9. António Afonso & José Alves & Sofia Monteiro, 2024. "The pressure is on: how geopolitical tensions impact institutional fiscal and external stability responses," Working Papers REM 2024/0318, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
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    12. António Afonso & Philemon Kwame Opoku, 2018. "The Relationship between Fiscal and Current Account Imbalances in OECD Economies," Working Papers REM 2018/61, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
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    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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