We assess the sustainability of external imbalances for EU countries using panel stationarity tests of Current Account (CA) balance-to-GDP ratios and panel cointegration of exports and imports of goods and services, for the period 1970Q1–2015Q4. We find that: i) the country panel is non-stationary; ii) cross-sectional dependence plays an important role; iii) there is non-stationarity of the CA, imports, and exports with cross-sectional panel dependence and multiple structural breaks; iv) however, there is a stable long-run relationship between exports and imports in the panel. Hence, trade imbalances can be less unsustainable but this is not sufficient to make current account imbalances sustainable.
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The relation between global external disequilibria and the financial crisis is discussed at length in Obstfeld and Rogoff (2010).
Source: OECD data. The Appendix provides more detailed descriptive statistics for the current account, export and import series.
Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Luxembourg, Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, UK.
CBL (2005) suggested the specified maximum number of structural breaks to be five. We compute the finite sample critical values using Monte Carlo simulations (20,000 replications).
See Chudik et al. (2011) for exact definitions of weak and strong dependence.
Since we have non-stationarity present in the panel the deterministic component used in test statistics is the constant as we first difference relevant series.
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We thank two anonymous referees for useful comments and suggestions on an earlier version of the paper. This work was supported by the FCT (Fundação para a Ciência e a Tecnologia) [grant number UID/ECO/00436/2019] and the resources granted to the Faculty of Economics and International Relations of the Cracow University of Economics as a part of the subsidy for the maintenance of the research potential. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official view or position of the Portugal Public Finance Council. Any remaining errors are the authors’ sole responsibility.
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Afonso, A., Huart, F., Jalles, J.T. et al. Long-run relationship between exports and imports: current account sustainability tests for the EU. Port Econ J (2019). https://doi.org/10.1007/s10258-019-00168-x
- Current account
- Unit roots