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Current Account Sustainability in Latin America Considering Nonlinearities

Author

Listed:
  • Daniel Ordoñez-Callamand

    () (Banco de la República de Colombia)

  • Luis F. Melo-Velandia

    () (Banco de la República de Colombia)

  • Oscar M. Valencia-Arana

    () (Banco de la República de Colombia)

Abstract

We test current account sustainability based on the framework developed by Hakkio and Rush [1991] and Husted [1992] using a two-regime threshold vector error correction model. This methodology allows us to characterize short-run nonlinearities in the current account. We estimate the model for four Latin American economies: Chile, Brazil, Colombia, and Mexico. We find a long-run relationship between the current account components, which implies strong sustainability for Chile and Mexico and weak sustainability for Colombia and Brazil. For the first two countries, the predominant regime is associated with a current account surplus. In contrast, for Colombia and Brazil, the prevailing regime corresponds to a situation in which there is a long- run deficit. In general, the impulse response analysis shows that expenditure and income shocks have positive and significant responses in the predominant regime for both series.

Suggested Citation

  • Daniel Ordoñez-Callamand & Luis F. Melo-Velandia & Oscar M. Valencia-Arana, 2017. "Current Account Sustainability in Latin America Considering Nonlinearities," Borradores de Economia 987, Banco de la Republica de Colombia.
  • Handle: RePEc:bdr:borrec:987
    DOI: 10.32468/be.987
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    More about this item

    Keywords

    Threshold vector error correction; current account sustainability; generalized impulse response function;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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