Is the US current-account deficit sustainable? The importance of structural breaks in testing sustainability

Dimitris Hatzinikolaou, Theodore Simos () and Agathi Tsoka ()
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Agathi Tsoka: University of Ioannina, Department of Economics

Economics Bulletin, 2013, vol. 33, issue 4, 2817-2827

Abstract: This paper improves the test for deficit sustainability developed by Hatzinikolaou and Simos (2013, henceforth HS) by taking into account structural breaks when deriving critical values for the test. Using quarterly data on the US current-account deficit, 1947.1-2012.2, we find that taking into account a structural break when testing for cointegration and when estimating a Box-Jenkins model for the derivation of the critical values renders the HS test more powerful than when ignoring the break. Thus, although HS failed to reject sustainability using their full sample period, 1947.1-2010.1, with the updated sample we can reject sustainability at the 10% level.

Keywords: Current-account; sustainability tests; structural break (search for similar items in EconPapers)
JEL-codes: C1 F4 (search for similar items in EconPapers)
Date: 2013-11-05
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Citations: View citations in EconPapers (1)

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