European Current Account Sustainability: New Evidence Based On Unit Roots and Fractional Integration

In this paper we examine current account sustainability for some European countries. However, instead of using classic approaches based on standard I(0)/I(1) procedures, we use other more recent techniques for unit roots along with fractionally integrated methods. Our findings can be summarized as follows: according to the Ng and Perron's (2001) procedure, exports and imports are non-stationary I(1) variables in most of the countries. However, using fractional methods, exports and imports are in most cases I(d) with d>1. With respect to the current accounts, the orders of integration are generally smaller than in the cases of exports and imports, in some cases even smaller than 1, though the unit root cannot be rejected in the majority of the countries. Therefore, we obtain little or no evidence of current account sustainability in the European countries examined.