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Current account sustainability in the US: What did we really know about it?

  • Christopoulos, Dimitris
  • León-Ledesma, Miguel A.

We analyze the sustainability of the US current account (CA) deficit by means of unit-root tests. First, we argue that there are several reasons to believe that the CA may follow a non-linear mean-reversion behavior under the null of stationarity. Using a non-linear ESTAR model we can reject the null of non-stationarity favoring the sustainability hypothesis. Second, we ask whether unit-root tests are a useful indicator of sustainability by comparing in-sample results for the 1960-2004 period to the developments observed up to the end of 2008. We find that the non-linear model outperforms the linear and random walk models in terms of forecast performance. The large shocks to the CA observed in the last five years induced a faster speed of mean reversion, ensuring the necessary adjustment to meet the inter-temporal budget constraint.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 29 (2010)
Issue (Month): 3 (April)
Pages: 442-459

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:3:p:442-459
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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