Current account sustainability and nonlinear adjustment

ABSTRACT

The existence of mean reversion in current account is examined for 28 countries, using linear and nonlinear unit root tests. The adjustment in current account to GDP ratio could take an asymmetric form depending on the size and sign of the deviation from the equilibrium. The results indicate mean-reversion for three-quarters of the sample. For nine countries, only non-linear tests suggest mean reversion. These results imply that the tests should take into account possible asymmetries in the adjustment behaviour.

KEYWORDS:

• Current account sustainability
• stationarity
• nonlinear adjustment
• nonlinear models

JEL CLASSIFICATION:

• C22
• F32

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplementary material

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Notes

¹ For mathematical proofs, see Trehan and Walsh (1991) and Taylor (2002).

² See Omay, Emirmahmutoglu, and Shahzad (2021) and Emirmahmutoglu et al. (2021) for a comparison of optimization algorithms used to select fractional frequency, smooth break detection and de-trending in unit root tests.