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A Non-Linear Approach to Current Account Sustainability—The Cases of Germany, China, and the USA

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  • Thanos Poulakis

    (Department of Balkan, Slavic and Oriental Studies, University of Macedonia, 54636 Thessaloniki, Greece)

  • Dimitrios Kyrkilis

    (Department of Balkan, Slavic and Oriental Studies, University of Macedonia, 54636 Thessaloniki, Greece)

Abstract

This paper examines the sustainability of the current account balances for three leading economies that play significant roles in global financial and geopolitical developments: Using the concept of sustainability as the ability of an economy to meet its long-term intertemporal budget constraint, the analysis evaluates whether the current accounts of these three economies can maintain this condition without requiring substantial policy interventions or significant changes in private sector behavior. The stationarity of the current account is considered a sufficient condition for testing the sustainability of the current account balance. However, it is argued that the common assumption of a linear process for the current account under the alternative hypothesis of stationarity may not accurately reflect reality, as the current account may exhibit non-linear behavior. Therefore, both linear and non-linear unit root tests are employed to investigate current account sustainability. The results of the unit root tests indicate that the current account balances of Germany, China, and the United States are unsustainable. These findings have significant implications for the economic stability and policy direction of these major economies.

Suggested Citation

  • Thanos Poulakis & Dimitrios Kyrkilis, 2024. "A Non-Linear Approach to Current Account Sustainability—The Cases of Germany, China, and the USA," JRFM, MDPI, vol. 17(12), pages 1-18, December.
  • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:12:p:565-:d:1545633
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    References listed on IDEAS

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    2. Trehan, Bharat & Walsh, Carl E, 1991. "Testing Intertemporal Budget Constraints: Theory and Applications to U.S. Federal Budget and Current Account Deficits," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(2), pages 206-223, May.
    3. Abadir, Karim M. & Distaso, Walter, 2007. "Testing joint hypotheses when one of the alternatives is one-sided," Journal of Econometrics, Elsevier, vol. 140(2), pages 695-718, October.
    4. Wickens, M. R. & Uctum, Merih, 1993. "The sustainability of current account deficits : A test of the US intertemporal budget constraint," Journal of Economic Dynamics and Control, Elsevier, vol. 17(3), pages 423-441, May.
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