The intertemporal budget constraint and current account sustainability in Cyprus: evidence and policy implications

摘要

Using the recently developed 'bounds' testing approach, this article provides evidence that Cyprus is not in violation of its intertemporal budget constraint and its current account balance is 'strongly' sustainable in the long-run. A policy implication of these findings is that the loss of exchange rate policy following the adoption of the euro in 2008 may not be a serious cost for Cyprus. On a methodological level, the results presented in this article support theoretical models that employ an intertemporal approach to modelling the current account.