On the solvency of nations: Cross-country evidence on the dynamics of external adjustment

► We test the external solvency and examine the dynamics of external adjustments. ► We use data for 50 countries over 1970-2006 period. ► Our analysis adapts an error-correction reaction function to a dynamic panel framework. ► A significant, negative response of net exports to net foreign assets (NFA) exist in our sample. ► Weaker fundamentals require stronger response to the changes in NFA to remain on a sustainable path.