Current account sustainability in advanced economies

Abstract

This paper investigates the sustainability of current accounts in advanced economies using a panel of 27 countries and annual data over the 1980–2008 period. Relying on various panel unit root tests and a sequential panel selection method, we find strong evidence in favour of nonlinear but stationary current account trajectories only for 7 countries, while the remaining 20 appear to be non-stationary and thus unsustainable. Our analysis indicates that careful empirical modelling of current account dynamics, particularly in relation to cross-section dependence and nonlinear behaviour, is crucial for appropriate economic policy-making.

Keywords:

• current account sustainability
• panel unit root tests
• nonlinearity

JEL Classification:

• C33

Notes

The choice of countries and time period follows the WEO definition of ‘advanced economies’ and data availability.

For instance, the overall deficit for countries with a negative CA balance in the 2006–2008 period decreased by half in the 2009–2011 period, going from about 7.75 to 3.90% of GDP.

Lee and Wu (2012) show that the performance of the test is not affected by heterogeneous lag orders across i.

As k = 1 turns out to be the optimal Fourier frequency component independently of the lag order, we carried out the BCADF estimations by fixing k = 1 and selecting the appropriate lag order p for each country regression via the procedure proposed by Ng and Perron (1995).

For consistency with all the other tests performed in the paper, the results in Table 6 refer to the 1980–2008 time span.