Is the US current-account deficit sustainable? The importance of structural breaks in testing sustainability
This paper improves the test for deficit sustainability developed by Hatzinikolaou and Simos (2013, henceforth HS) by taking into account structural breaks when deriving critical values for the test. Using quarterly data on the US current-account deficit, 1947.1-2012.2, we find that taking into account a structural break when testing for cointegration and when estimating a Box-Jenkins model for the derivation of the critical values renders the HS test more powerful than when ignoring the break. Thus, although HS failed to reject sustainability using their full sample period, 1947.1-2010.1, with the updated sample we can reject sustainability at the 10% level.
Volume (Year): 33 (2013)
Issue (Month): 4 ()
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- Gregory, Allan W. & Hansen, Bruce E., 1996.
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- Dimitris Hatzinikolaou & Theodore Simos, 2013. "A new test for deficit sustainability and its application to US data," Empirical Economics, Springer, vol. 45(1), pages 61-79, August.
- Hatzinikolaou, Dimitris & Simos, Theodore, 2011. "A new test for deficit sustainability and its application to US data," MPRA Paper 45393, University Library of Munich, Germany, revised 17 Jan 2012.
- Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233.
- Junsoo Lee & Mark C. Strazicich, 2003. "Minimum Lagrange Multiplier Unit Root Test with Two Structural Breaks," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1082-1089, November. Full references (including those not matched with items on IDEAS)
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