Statistical omissions as the stabilizing factor of net foreign assets in EU countries

Abstract

In this paper, we investigate the effect of balance of payments statistical leakages (Net errors and omissions) on the external solvency of net foreign asset positions in the EU28 sample over the period 1995–2019. The Bohn (2007) error-correction reaction function approach adapted to a dynamic panel framework (pooled mean group estimator) yields evidence of a substantial improvement in the sustainability of external positions in one out of four analyzed countries (compared to only one to three countries reporting deterioration), once the extent of hypothesized trade and non-interest income misreporting is accounted for. These findings may reflect the presence of a possible association between statistical omissions and current account transactions linked to remittances flows or tax optimization behavior, as the statistical leakages are sensitive to changes in corporate tax rates and international migrant stock.