Reviewing the sustainability/stationarity of current account imbalances with tests for bounded integration

Herwartz, H. and Xu, F. (2008) Reviewing the sustainability/stationarity of current account imbalances with tests for bounded integration. The Manchester School, 76 (3). pp. 267-278. ISSN 1467-9957 doi: 10.1111/j.1467-9957.2008.01059.x

Abstract/Summary

We investigate for 26 OECD economies whether their current account imbalances to GDP are driven by stochastic trends. Regarding bounded stationarity as the more natural counterpart of sustainability, results from Phillips–Perron tests for unit root and bounded unit root processes are contrasted. While the former hint at stationarity of current account imbalances for 12 economies, the latter indicate bounded stationarity for only six economies. Through panel-based test statistics, current account imbalances are diagnosed as bounded non-stationary. Thus, (spurious) rejections of the unit root hypothesis might be due to the existence of bounds reflecting hidden policy controls or financial crises.