Intertemporal Solvency in the Small Open Economy of Australia

This paper employs cointegration and multicointegration analysis to explore the issue of external solvency in the small open economy of Australia. Results indicate that in the fixed exchangerate era exports and imports are multicointegrated while in the more recent floating exchange-rate period the series do not share a conventional long-run equilibrium relationship. The results are consistent with intertemporal external solvency in the early period and insolvency more recently. Sustainability criteria are reviewed. Indications are that low saving and investment rates may inhibit Australia's abiliry to sustain persistent external imbalances, however, recent fiscal adjustments may work to abate this problem.