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Testing for the Sustainability of the Current Account Deficit in Four Industrial Countries: A Revisitation

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  • Shyh-Wei Chen

    (Department of International Trade, Chung Yuan Christian University)

Abstract

In this article we re-examine the mean-reverting property of the current account for the US, the UK, Canada and France. This is important because a current account that is not a stationary process implies that the external debts are unsustainable. The empirical results show that the current account-GDP ratios for the four countries are non-stationary processes based on the traditional unit root test. Bierens' non-linear unit root test results show that these current account-GDP ratios could exhibit mean stationarity, trend stationarity and non-linear trend stationarity once we account for a more general specification of the non-linear deterministic components based on a Chebishev polynomials approximation. One should, therefore, be cautious when concluding that the current account is sustainable or unsustainable based upon the traditional unit root test since it overlooks the non-linear property intrinsic in the data.

Suggested Citation

  • Shyh-Wei Chen, 2010. "Testing for the Sustainability of the Current Account Deficit in Four Industrial Countries: A Revisitation," Economics Bulletin, AccessEcon, vol. 30(2), pages 1474-1495.
    • Handle: RePEc:ebl:ecbull:eb-09-00313
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    More about this item

    Keywords

    Current account; sustainability; unit root; non-linearity;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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