Threshold adjustment in the current account: sustainability for danger zone economies?

Abstract

We explore the presence of nonlinear adjustment behaviour in current accounts of 29 countries, using linear and nonlinear unit root tests. Our results suggest threshold adjustment in the current accounts of countries with relatively higher average current account deficits. Nonlinear mean reversion might be an indication of sustainability of the current account for these danger zone economies.

Keywords:

• current account sustainability
• stationarity
• nonlinear adjustment
• nonlinear models

JEL Classification:

• C22
• F32

The views and opinions presented in this study belong to the author and do not necessarily represent those of the Central Bank of the Republic of Turkey or its staff.

Notes

¹ See Trehan and Walsh (1991) and Taylor (2002) for proofs.

² See Christopoulos and León-Ledesma (2010) for a review of this literature.

³ Another minor point to note is that among linear unit root tests Phillips–Perron test is the one that provides most similar results with the nonlinear unit root tests.