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 ()
|Contact details of provider:|| |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Allan w. Gregory & Bruce E. Hansen, 1992.
"residual-Based Tests for Cointegration in Models with Regime Shifts,"
862, Queen's University, Department of Economics.
- Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
- Gregory, A.W. & Hansen, B.E., 1992. "Residual-Based Tests for Cointegration in Models with Regime Shifts," RCER Working Papers 335, University of Rochester - Center for Economic Research (RCER).
- Hatzinikolaou, Dimitris & Simos, Theodore, 2011.
"A new test for deficit sustainability and its application to US data,"
45393, University Library of Munich, Germany, revised 17 Jan 2012.
- 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.
- Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233.
- Husted, Steven, 1992. "The Emerging U.S. Current Account Deficit in the 1980s: A Cointegration Analysis," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 159-66, February.
- Gregory, Allan W & Hansen, Bruce E, 1996.
"Tests for Cointegration in Models with Regime and Trend Shifts,"
Oxford Bulletin of Economics and Statistics,
Department of Economics, University of Oxford, vol. 58(3), pages 555-60, August.
- Tom Doan, . "GREGORYHANSEN: RATS procedure to implement Gregory-Hansen test for Cointegration with breaks," Statistical Software Components RTS00082, Boston College Department of Economics.
- M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
- Hakkio, Craig S & Rush, Mark, 1991. "Is the Budget Deficit "Too Large?"," Economic Inquiry, Western Economic Association International, vol. 29(3), pages 429-45, July.
When requesting a correction, please mention this item's handle: RePEc:ebl:ecbull:eb-13-00208. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (John P. Conley)
If references are entirely missing, you can add them using this form.