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Are current account deficits really sustainable in the G-7 countries?

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  • Chen, Shyh-Wei

Abstract

Whether or not a current account deficit is sustainable has important implications for policy. If the current account deficit of a nation is sustainable, then it implies that the government should have no incentive to default on its international debt. In this article, we examine whether or not the current account deficits of the G-7 countries can be characterized by a unit root process with regime switching. The econometric methodology allows us to distinguish periods that are associated with unsustainable outcomes from those in which the intertemporal national long-run budget constraint (LRBC) holds. Among the main results, it is found that the likelihood of the LRBC holding is high for Germany and Japan, and thus the current account deficits are most likely to be sustainable. It is, however, very likely that the LRBC will not hold for Canada, France, Italy, the UK or the US, thus signifying a red signal that the current account deficits observed during the period were probably not on a sustainable path.

Suggested Citation

  • Chen, Shyh-Wei, 2011. "Are current account deficits really sustainable in the G-7 countries?," Japan and the World Economy, Elsevier, vol. 23(3), pages 190-201.
  • Handle: RePEc:eee:japwor:v:23:y:2011:i:3:p:190-201
    DOI: 10.1016/j.japwor.2011.04.002
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    Cited by:

    1. Chen, Shyh-Wei & Xie, Zixiong, 2015. "Testing for current account sustainability under assumptions of smooth break and nonlinearity," International Review of Economics & Finance, Elsevier, vol. 38(C), pages 142-156.
    2. Manoranjan SAHOO & M Suresh BABU & Umakant DASH, 2016. "Current account sustainability in SAARC economies: Evidence from combined cointegration approach," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(4(609), W), pages 281-298, Winter.
    3. Chen, Shyh-Wei, 2014. "Smooth transition, non-linearity and current account sustainability: Evidence from the European countries," Economic Modelling, Elsevier, vol. 38(C), pages 541-554.
    4. Sahoo, Manoranjan & Babu, M. Suresh & Dash, Umakant, 2016. "Long run sustainability of current account balance of China and India: New evidence from combined cointegration test," MPRA Paper 79013, University Library of Munich, Germany, revised 2016.
    5. Gnimassoun, Blaise & Coulibaly, Issiaka, 2014. "Current account sustainability in Sub-Saharan Africa: Does the exchange rate regime matter?," Economic Modelling, Elsevier, vol. 40(C), pages 208-226.
    6. Ozge Kandemir Kocaaslan, 2016. "Regime Nonstationarity and Nonlinearity in the Turkish Output Level," International Journal of Economics and Financial Issues, Econjournals, vol. 6(2), pages 503-507.
    7. Jungho Baek, 2016. "Analyzing a Long-Run Relationship between Exports and Imports Revisited: Evidence from G-7 Countries," Economics Bulletin, AccessEcon, vol. 36(2), pages 665-676.
    8. repec:ege:journl:v:18:y:2018:i:1:p:121-134 is not listed on IDEAS
    9. Chen, Shyh-Wei, 2013. "Long memory and regime switching properties of current account deficits in the US," Economic Modelling, Elsevier, vol. 35(C), pages 78-87.

    More about this item

    Keywords

    Current account; Sustainability; Unit root; Markov switching; Nonlinearity;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables

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