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. Res ults indicate that in the fixed exchange-rate era exports and imports are m ulticointegrated 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 pe riod and insolvency more recently. Sustainability criteria are reviewed. In dications are that low saving and investment rates may inhibit Australia's ability to sustain persistent external imbalances, however, recent fiscal a djustments may work to abate this problem.