Global imbalances and the Intertemporal External Budget Constraint: A multicointegration approach

This paper analyzes the external solvency of a group of 23 OECD countries for the period 1970-2012 The empirical strategy adopted underlines the increasing importance of the ?nancial channel for the external adjustment as proposed in Gourinchas and Rey (2007). We unify the traditional approaches to testing for external sustainability considering the stock-?ow system created by the variables representing the external relationships of an open economy. External sustainability is tested using several types of cointegration and multicointegration tests. The results obtained point to weak sustainability in the ?ows analysis, whereas some degree of strong sustainability is found for up to six countries in the stock ?ow approach. Among these countries we ?nd both non-European economies, such as Japan and New Zealand, and Euro-area members especially those with more restricted access to ?nancing in the international markets.