The External Balance Assessment

(EBA) Methodology
Camila Casas
Open Economy Division
IMF Research Department

April 2023
 External assessment are a key mandate of the IMF

• External assessment are necessary to foster stability of members’ economies and

the international monetary system
→ Important element of IMF surveillance

• Continuous and evenhanded monitoring of members’ policies

• Regular Article IV consultations
• External Sector Report
• Assessments for the Wider Membership

• Anchored on several Executive Board decisions (e.g., 2007 Surveillance Decision,

2011/14 TSR and 2012 ISD)

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 Background

• Consultative Group on Exchange Rate Issues (CGER)

ER assessments from a multilateral perspective to inform country-specific staff views

• The External Balance Assessment (EBA) methodology

• Differentiates between a positive description of drivers and normative evaluations
→ integrates policy advice
• Broader assessment
• Multilaterally consistent

• EBA framework is revised periodically

• Updated toolkit, but basic principles remain unchanged
• Previous refinements in 2015 (EBA-lite), 2018
• Current version introduced in 2022 (incl. sample update)

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 The External Balance Assessment (EBA)
methodology

• EBA’s goal/challenge: distinguish excess from appropriate imbalances in a

multilaterally consistent way

• External imbalances can signal risks for global economy, but not every
imbalance is risky or undesirable
→ economies with ageing populations should save more; those with high growth potential
should invest more

• Assess role of domestic policies on external sector outcomes

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 The EBA Framework and the IMF’s External
Assessments

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 The EBA Current Account (CA) Model

𝐶𝐴
𝑖𝑡 = 𝛼 + 𝑪𝑖𝑡 𝛽 + 𝑭𝑖𝑡 𝜆 + 𝑷𝑖𝑡 𝛾 + 𝑢𝑖𝑡
𝑌

Cyclical and Short-Term Fundamentals (F) Actual Policies (P)

Factors (C) Macroeconomic Fiscal balance
Output gap Net foreign assets Health spending
Commodity terms of trade Output per worker Credit gap
Lagged REER annual change Expected growth FXI and Capital controls
Structural
Demographics
Institutional quality
Oil and gas resources

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 Estimating the EBA CA Model

• The CA balance is the gap between aggregate saving and investment

• The selection of covariates is based on economic theory regarding the determinants

of saving and investment and on statistical robustness

• Panel regression: 52 AEs and EMDEs over 1986-2019

• About 90% of world economy
• Exclude outliers (oil exporters, financial centers)
• Broad perspective, essential for multilaterally-consistent results

• Pooled GLS method with panel-wide AR(1) correction due to autocorrelation of CA

data
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 The Normative Aspect: Computing the EBA Norm
• Norms: Medium-term (equilibrium) benchmarks
→ Cyclically adjusted

• Based on medium-term structural features (F) and desirable policies (P*):

𝑁𝑜𝑟𝑚𝑖𝑡 = 𝛼ො + 𝑭𝑖𝑡𝜆መ + 𝑷𝑖𝑡 ∗
𝛾ො

• Desirable (medium-term) policies are benchmarks, consistent with macro

framework

• Staff norms may include adjustments for country-specific factors not included
in the model
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 Deriving the CA Gap

• EBA Gaps: Difference between cyclically-adjusted CA balance and norm

𝐶𝐴
𝐺𝑎𝑝𝑖𝑡 = 𝑖𝑡 − 𝐶𝑖𝑡
መ
𝛽 − 𝛼ො + 𝑭 𝑖𝑡
መ
𝜆 + 𝑷 ∗
𝑖𝑡 𝛾
ො
𝑌
= 𝑷𝑖𝑡 − 𝑷∗ 𝑖𝑡 𝛾ො + 𝑢𝑖𝑡

Contribution of Policy Gaps (P-P*): Regression Residual:

how much policies contribute to CA gap? Unexplained factors

• Staff Gaps may include adjustments for country-specific factors not included
in the model (via norm or adjusted CA)
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 Converting CA gaps into ER gaps:
the EBA CA-REER Semi-elasticities

• CA gaps can be converted into REER gaps using country-specific semi-

elasticities

→ What is the REER adjustment need to close the CA gap?

• CA-REER Semi-elasticity:
𝐶𝐴
𝛥 (𝐺𝐷𝑃)
𝛥 𝑅𝐸𝐸𝑅 = ηCA ≈ ηTB + ηIB
𝑅𝐸𝐸𝑅
Goods and Income
services trade account

CA gap
→ For a given CA gap: REER gap =
ηCA
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 The EBA REER Models
• Index and Level models complement the CA model by capturing a different
aspect of the external sector (prices vs. quantities)

• The REER is a measure of the value of a currency against a weighted

average of several foreign currencies, divided by a price deflator
→ REER increase(decrease) implies appreciation(depreciation) of domestic currency

• REER Index: changes vs. base year

• REER Level: differences in relative prices across economies

• Similar determinants as in CA model

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 References for detailed information

• 2022 Update of the External Balance Assessment Methodology

IMF Working Paper No. 2023/047

• The External Balance Assessment (EBA) Methodology

IMF Working Paper No. 2013/272

• 2022 External Sector Report (ESR)

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Additional Information
 EBA Countries

Argentina*# Egypt*# Korea Russia

Australia Finland Malaysia South Africa
Austria France Mexico Spain
Bangladesh*# Germany Morocco*# Sri Lanka*#
Belgium Greece Netherlands Sweden
Brazil Guatemala*# New Zealand Switzerland
Canada Hungary Norway Thailand
Chile India Pakistan# Tunisia*#
China Indonesia Peru Türkiye
Colombia Ireland Philippines United Kingdom
Costa Rica*# Israel Poland United States
Czechia Italy Portugal Uruguay*#
Denmark Japan Romania*# Vietnam*#
Notes:
Notes: All countriesare
All countries are included
included in the
in the currentFor
CA model. account model. reasons,
data availability Asterisks
the(*)REER
denote countries
models not included
are estimated in
with a smaller
REER
sample.index regression;
Asterisks (*) denotesharps (#)not
countries denote countries
included in REER not inregression;
index REER levels regression
sharps (#) denotefor data availability
countries not includedreasons.
in REER
levels regression. The EBA framework provides out-of-sample REER estimations for all EBA countries not included in the REER
samples.

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 Variables Sources
Current Account World Economic Outlook

Data Output Gap World Economic Outlook

Sources Commodity Terms of Trade

Real Effective Exchange Rate

World Economic Outlook and World Integrated Trade Solution(WITS)

Information Notice System (INS)

Net Foreign Assets (NFA) position EWN: Lane, Milesi Ferretti and World Economic Outlook

Output per worker, relative to top 3 economies World Economic Outlook

CURRENT ACCOUNT
Expected real GDP growth (5 years ahead) World Economic Outlook

Demographic varaibles UN World Population Prospects, 2019 Vintage

Institutional Quality International Country Risk Guide (ICRG)

Exhaustible Resources of Oil and Natural Gas World Economic Outlook, WITS and BP Statistical Review of World Energy

Fiscal Policy World Economic Outlook

Health Spending OECD, and WDI

Foreign Exchange Intervention (FXI) World Economic Outlook, Data Template on International Reserves and Foreign Currency Liquidity

Capital Account Openness IMF (Baba and others, forthcoming)

Credit Gap BIS (Credit statistics) and World Bank (Global Financial Development Database)

Real Effective Exchange Rate Information Notice System (INS)

REER INDEX

Trade Openness World Economic Outlook

Home bias BIS (Debt Securities Statistics)

Real Interest Rates (interacted with capital controls) International Financial Statistics, World Economic Outlook, Haver, and IMF (Baba and others, forthcoming)

Price Level International Comparison Program (ICP), released 2020

Capital Stock per employed person Penn World Table version 10.0
REER LEVEL

Ratio of Traded/Non-Traded sector Productivity Mano and Castillo (2015), World Bank World Development Indicator (WDI) Database

Reserve currency status (RCS) IMF, COFER

VAT Revenue OECD, World Revenue Longitudinal Data set (WoRLD), UNU-WIDER Government Revenue Dataset (2021)
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 External Sector Assessment Categories

REER Gap Description in

CA Gap
(Using elast. of −0.2)  Overall Assessment
> 4% < −20% … substantially stronger …
2%, 4% −20%, −10%  … stronger …
1%, 2% −10%, −5%  … moderately stronger …

The external position is broadly

−1%, 1%  −5%, 5%  in line with fundamentals and
desirable policies.

−2%, −1%  5%, 10% … moderately weaker …

−4%, −2%  10%, 20% … weaker …
<−4% > 20% … substantially weaker …

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