Are Current Account Imbalances Between EMU Countries Sustainable?
WORKING PAPER
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Evidence suggests that the introduction of the EMU is associated with a shift from sustainability to unsustainability of external debt accumulation among the Euro countries considered.
Using parametric and non-parametric estimation techniques, this paper analyzes the sustainability of the recently growing current account imbalances in the Euro Area and tests whether the introduction of the European Monetary Union has aggravated these imbalances. For these purposes, two alternative criteria for the assessment of external debt sustainability are considered: one based on intertemporal budget constraints as proposed by Bohn (1998), and the other based on the stationarity properties of the stochastic process of the debt-to-GDP ratio.