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Testing for the Sustainability of the Current Account Deficit in Four Industrial Countries: A Revisitation

  • Shyh-Wei Chen

    ()

    (Department of International Trade, Chung Yuan Christian University)

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    In this article we re-examine the mean-reverting property of the current account for the US, the UK, Canada and France. This is important because a current account that is not a stationary process implies that the external debts are unsustainable. The empirical results show that the current account-GDP ratios for the four countries are non-stationary processes based on the traditional unit root test. Bierens' non-linear unit root test results show that these current account-GDP ratios could exhibit mean stationarity, trend stationarity and non-linear trend stationarity once we account for a more general specification of the non-linear deterministic components based on a Chebishev polynomials approximation. One should, therefore, be cautious when concluding that the current account is sustainable or unsustainable based upon the traditional unit root test since it overlooks the non-linear property intrinsic in the data.

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    File URL: http://www.accessecon.com/Pubs/EB/2010/Volume30/EB-10-V30-I2-P136.pdf
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    Article provided by AccessEcon in its journal Economics Bulletin.

    Volume (Year): 30 (2010)
    Issue (Month): 2 ()
    Pages: 1474-1495

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    Handle: RePEc:ebl:ecbull:eb-09-00313
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