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Do Latin American Countries Have an Incentive to Default on Their External Debts?: A Perspective Based on Long-Run Current Account Behavior

  • MARK J. HOLMES

It is argued that the sustainability of external debts depends on the stationarity of the current account balance. This study tests for the stationarity of current account deficits for a sample of sixteen Latin American countries, employing a new test, advocated by Breuer et al. (2002), that allows one to test for unit roots in heterogeneous panel data sets. This version of the augmented Dickey-Fuller (ADF) test involves estimating ADF regressions within a seemingly unrelated regression (SURADF) framework. The benefits of creating a panel to overcome low test power are well known, but this particular test also offers key advantages over existing alternative panel data unit root tests. Unlike previous tests, this one identifies which members from within the panel are responsible for rejecting the null hypothesis of joint nonstationarity. In addition, the SURADF test does not presume disturbances that are independently and identically distributed. Using annual data covering the period 1979-2001, this study finds strong evidence in favor of current account mean-reversion for at least twelve Latin American countries.

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Article provided by M.E. Sharpe, Inc. in its journal Emerging Markets Finance and Trade.

Volume (Year): 42 (2006)
Issue (Month): 1 (February)
Pages: 33-49

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Handle: RePEc:mes:emfitr:v:42:y:2006:i:1:p:33-49
Contact details of provider: Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=111024

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