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Current Account Sustainability in G7 and BRICS: Evidence from a Long Memory Model with Structural Breaks

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  • Christophe André

    (Economics Department, Organisation for Economic Co-operation and Development (OECD), France
    Eastern Mediterranean University, Northern Cyprus, via Mersin 10, Turkey, Montpellier Business School, Montpellier, France and University of Pretoria, Pretoria, 0002, South Africa)

  • Tsangyao Chang

    (Department of Finance, College of Finance, Feng Chia University, Taichung, Taiwan)

  • Luis A. Gil-Alana

    (University of Navarra, Faculty of Economics and ICS (NCID), Spain)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, South Africa)

Abstract

In this paper, we extend the existing literature on the sustainability of current account deficits by examining the relevance of long memory and structural breaks in modelling the dynamics of current account to GDP ratios. Unlike standard unit root tests, which can only indicate whether a series is stationary or not by looking at 0 or 1 for the orders of integration and which have low power, especially in cases where the series is characterized by a fractional process, the long memory approach provides an exact measure of the degree of persistence. However, long memory models are known to overestimate the degree of persistence of the series in the presence of structural breaks, which are very likely in quarterly macroeconomic data covering a long period. Indeed, we show that regime changes do exist in both the mean and trend of the current account to GDP ratios. Thus, we test persistence allowing for both smooth and sharp breaks. Our methodology also allows us to include any number of sharp breaks, whereas standard unit root tests only permit either one or two breaks. Hence, our approach is more general and more robust to misspecifications caused by the omission of breaks than standard methods. To the best of our knowledge, this is the first paper testing for the sustainability of current account balances in the seven major advanced economies (G7) and the BRICS group of countries using long-memory models incorporating both smooth and sharp breaks.

Suggested Citation

  • Christophe André & Tsangyao Chang & Luis A. Gil-Alana & Rangan Gupta, 2017. "Current Account Sustainability in G7 and BRICS: Evidence from a Long Memory Model with Structural Breaks," Working Papers 201705, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:201705
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    Cited by:

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    3. Yushi Yoshida & Weiyang Zhai, 2021. "Revisiting the Glick–Rogoff Current Account Model: An Application to the Current Accounts of BRICS Countries," Dynamic Modeling and Econometrics in Economics and Finance, in: Gilles Dufrénot & Takashi Matsuki (ed.), Recent Econometric Techniques for Macroeconomic and Financial Data, pages 265-291, Springer.

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    More about this item

    Keywords

    Current account; sustainability; long-memory; smooth and sharp breaks; G7; BRICS;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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