Empirical studies on the validity of the intertemporal budget constraint

Abstract

This chapter gives an overview of the empirical studies on the intertemporal budget constraint (IBC). Based on the sufficient conditions for the validity of the IBC derived in the previous chapter, the relevant empirical literature can be mainly divided into three groups. The first group seeks to determine the order of integration in the net international investment position (NIIP) and the current account series because difference-stationarity of the NIIP and the current account (of any order) is sufficient to satisfy the IBC. When the NIIP is stationary in levels or first differences, the current account is stationary in levels and sustainable in the strong sense; when the NIIP is stationary in (at least) second differences, the current account is stationary in first differences and sustainable in the weak sense. The first group of the studies on the validity of the IBC is examined in section 5.1.