Current account sustainability: structural change and unit root tests

High and persistent current account deficits in developed countries have long been the focus of research in economics. Many researchers who study current account sustainability use conventional unit root tests to investigate the mean reverting behaviour of the current account. In this paper we analyze whether the Spanish current account deficit is sustainable or not. For this purpose we test the current account stationarity by means of traditional unit root tests, taking into account the possibility of structural change and changes in the order of integration. We find no evidence of the sustainability of the Spanish current account. In fact we argue that this lack of sustainability comes from the current account behaviour since the introduction of the euro in the Spanish monetary system. The methodology can be easily applied to other economies suffering from persistent current account deficit, as Greece, Portugal and the United States.

Vicente Donoso Donoso
Víctor Martín Barroso
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