Home Sustainability of Current Account Deficits in the OECD Countries: Evidence from Panel Data Estimators
Article
Licensed
Unlicensed Requires Authentication

Sustainability of Current Account Deficits in the OECD Countries: Evidence from Panel Data Estimators

  • Tarlok Singh EMAIL logo
Published/Copyright: September 1, 2017
Become an author with De Gruyter Brill

Abstract

This study estimates the intertemporal model for the relationship between imports and exports and examines the sustainability of CADs and validity of IBC for a comprehensive set of 24 OECD countries. The balanced panel data model is estimated using several single-equation and system estimators to assess the robustness of results across methodologies and test statistics. The study finds that the numerical magnitude of the slope parameter of imports is close to unity consistently across estimators. The standard panel data estimators provide consistent support for the sustainability of CADs and validity of IBC. The optimal FMOLS and DOLS estimators cross-validate the evidence and reinforce the sustainability of CADs. The residual-based single-equation and the VAR-based system cointegration estimators provide consistent support for the long-run equilibrium relationship between imports and exports. The support for the sustainability of CADs suggests that the current account deficits are only short-run phenomena and are balanced by future surpluses. The macroeconomic stabilisation strategies seem to have been effective in correcting the market failures and maintaining the steady-state equilibrium relationship between the inflow and outflow of resources.

References

Arellano, M., and S. Bond. 1991. “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations.” The Review of Economic Studies 58 (2): 277–297.10.2307/2297968Search in Google Scholar

Arize, A.C 2002. “Imports and Exports in 50 Countries: Tests of Cointegration and Structural Breaks.” International Review of Economics & Finance 11 (1): 101–115.10.1016/S1059-0560(01)00101-0Search in Google Scholar

Bajo-Rubio, O., C. Díaz-Roldán, and V. Esteve. 2014. “Sustainability of External Imbalances in the OECD Countries.” Applied Economics, February 46 (4): 441–449.10.1080/00036846.2013.851779Search in Google Scholar

Bergin, P.R., and S.M. Sheffrin. 2000. “Interest Rates, Exchange Rates and Present Value Models of the Current Account.” The Economic Journal 110 (463): 535–558.10.1111/1468-0297.00536Search in Google Scholar

Breitung, J 2002. “Nonparametric Tests for Unit Roots and Cointegration.” Journal of Econometrics 108 (2): 343–363.10.1016/S0304-4076(01)00139-7Search in Google Scholar

Camarero, M., J.L. Carrion-i-Silvestre, and C. Tamarit. 2013. “Global Imbalances and the Intertemporal External Budget Constraint: A Multicointegration Approach.” Journal of Banking & Finance 37 (12): 5357–5372.10.1016/j.jbankfin.2013.01.008Search in Google Scholar

Chen, S.-W., and Z. Xie. 2015. “Testing for Current Account Sustainability under Assumptions of Smooth Break and Nonlinearity.” International Review of Economics & Finance 38: 142–156.10.1016/j.iref.2015.02.015Search in Google Scholar

Christopoulos, D., and M.A. León-Ledesma. 2010. “Current Account Sustainability in the US: What Did We Really Know about It?” Journal of International Money and Finance 29 (3): 442–459.10.1016/j.jimonfin.2009.06.014Search in Google Scholar

Chu, H.-P., T. Chang, H.-L. Chang, C.-W. Su, and Y. Yuan. 2007. “Mean Reversion in the Current Account of Forty–Eight African Countries: Evidence from the Panel SURADF Test.” Physica A: Statistical Mechanics and Its Applications 384 (2): 485–492.10.1016/j.physa.2007.05.051Search in Google Scholar

Clarida, R.H., M. Goretti, and M.P. Taylor. 2007. “Are There Thresholds of Current Account Adjustment in the G7?.”. In Clarida, R.H. (Ed.), G7 Current Account Imbalances: Sustainability and Adjustment. 169–204. Chicago: The University of Chicago Press Chapter 5.10.7208/chicago/9780226107288.003.0006Search in Google Scholar

Dickey, D.A., and W.A. Fuller. 1981. “Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root.” Econometrica 49 (4): 1057–1072.10.2307/1912517Search in Google Scholar

Durdu, C.B., E.G. Mendoza, and M.E. Terrones. 2013. “On the Solvency of Nations: Cross-Country Evidence on the Dynamics of External Adjustment.” Journal of International Money and Finance 32: 762–780.10.1016/j.jimonfin.2012.07.002Search in Google Scholar

Edwards, S 2002. “Does the Current Account Matter?.”. In Edwards, S., and J.A. Frankel (Eds.), Preventing Currency Crises in Emerging Markets. 21–69. USA: National Bureau of Economic Research, The University of Chicago Press January, Chapter 1.10.7208/chicago/9780226185057.003.0002Search in Google Scholar

Engle, R.F., and C.W.J. Granger. 1987. “Cointegration and Error Correction: Representation, Estimation, and Testing.” Econometrica 55 (2): 251–276.10.2307/1913236Search in Google Scholar

Freund, C 2005. “Current Account Adjustment in Industrial Countries.” Journal of International Money and Finance 24 (8): 1278–1298.10.1016/j.jimonfin.2005.08.014Search in Google Scholar

Hadri, K 2000. “Testing for Stationarity in Heterogeneous Panel Data.” Econometrics Journal 3 (2): 148–161.10.1111/1368-423X.00043Search in Google Scholar

Hakkio, C.S., and M. Rush. 1991. “Is the Budget Deficit ‘Too Large?’.” Economic Inquiry 29 (3): 429–445.10.1111/j.1465-7295.1991.tb00837.xSearch in Google Scholar

Hansen, L.P 1982. “Large Sample Properties of Generalized Method of Moments Estimators.” Econometrica 50 (4): 1029–1054.10.2307/1912775Search in Google Scholar

Hausman, J.A 1978. “Specification Tests in Econometrics.” Econometrica 46 (6): 1251–1271.10.2307/1913827Search in Google Scholar

Holmes, M.J 2006. “How Sustainable are OECD Current Account Balances in the Long Run?” The Manchester School 74 (5): 626–643.10.1111/j.1467-9957.2006.00514.xSearch in Google Scholar

Husted, S 1992. “The Emerging U.S. Current Account Deficit in the 1980s: A Cointegration Analysis.” The Review of Economics and Statistics 74 (1): 159–166.10.2307/2109554Search in Google Scholar

Im, K.S., M.H. Pesaran, and Y. Shin. 2003. “Testing for Unit Roots in Heterogeneous Panels.” Journal of Econometrics 115 (1): 53–74.10.1016/S0304-4076(03)00092-7Search in Google Scholar

Irandoust, M., and J. Ericsson. 2004. “Are Imports and Exports Cointegrated? an International Comparison.” Metroeconomica 55 (1): 49–64.10.1111/j.0026-1386.2004.00182.xSearch in Google Scholar

Johansen, S. 1991. “Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models.” Econometrica 59(6): 1551–1580.10.2307/2938278Search in Google Scholar

Kao, C 1999. “Spurious Regression and Residual-Based Tests for Cointegration in Panel Data.” Journal of Econometrics 90 (1): 1–44.10.1016/S0304-4076(98)00023-2Search in Google Scholar

Kim, H., K.-Y. Oh, and C.-W. Jeong. 2005. “Panel Cointegration Results on International Capital Mobility in Asian Economies.” Journal of International Money and Finance 24 (1): 71–82.10.1016/j.jimonfin.2004.10.006Search in Google Scholar

Konya, L 2009. “The Sustainability of the Current Account in the Czech Republic, Hungary and Slovenia.” Empirical Economics 36 (2): 367–384.10.1007/s00181-008-0199-9Search in Google Scholar

Krugman, P.R 1988. “Sustainability and the Decline of the Dollar.”. In Bryant, R.C., G. Holtham, and P. Hooper (Eds.), External Deficits and the Dollar: The Pit and the Pendulum. 82–99. Washington, D.C: The Brookings Institution Press.Search in Google Scholar

Kwiatkowski, D., P.C.B. Phillips, P. Schmidt, and Y. Shin. 1992. “Testing the Null Hypothesis of Stationarity against the Alternative of a Unit Root: How Sure are We that Economic Time Series Have a Unit Root?” Journal of Econometrics 54 (1–3): 159–178.10.1016/0304-4076(92)90104-YSearch in Google Scholar

Lanzafame, M 2014. “Current Account Sustainability in Advanced Economies.” The Journal of International Trade & Economic Development 23 (7): 1000–1017.10.1080/09638199.2013.821152Search in Google Scholar

Levin, A., C.-F. Lin, and C.-S.J. Chu. 2002. “Unit Root Tests in Panel Data: Asymptotic and Finite-Sample Properties.” Journal of Econometrics 108 (1): 1–24.10.1016/S0304-4076(01)00098-7Search in Google Scholar

Levy, D 2000. “Investment–Saving Comovement and Capital Mobility: Evidence from Century Long U.S. Time Series.” Review of Economic Dynamics 3 (1): 100–136.10.1006/redy.1999.0060Search in Google Scholar

Liu, P.C., and E. Tanner. 1996. “International Intertemporal Solvency in Industrialized Countries: Evidence and Implications.” Southern Economic Journal 62 (3): 739–749.10.2307/1060891Search in Google Scholar

MacKinnon, J.G., A. Haug, and L. Michelis. 1999. “Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration.” Journal of Applied Econometrics 14 (5): 563–577.10.1002/(SICI)1099-1255(199909/10)14:5<563::AID-JAE530>3.0.CO;2-RSearch in Google Scholar

Maddala, G.S., and S. Wu. 1999. “A Comparative Study of Unit Root Tests with Panel Data and A New Simple Test.” Oxford Bulletin of Economics & Statistics 61 (4): 631–652.10.1111/1468-0084.61.s1.13Search in Google Scholar

Mark, N.C., and D. Sul. 2003. “Cointegration Vector Estimation by Panel DOLS and Long-Run Money Demand.” Oxford Bulletin of Economics and Statistics 65 (5): 655–680.10.1111/j.1468-0084.2003.00066.xSearch in Google Scholar

Matsubayashi, Y 2005. “Are US Current Account Deficits Unsustainable?: Testing for the Private and Government Intertemporal Budget Constraints.” Japan and the World Economy 17 (2): 223–237.10.1016/S0922-1425(04)00008-8Search in Google Scholar

Milesi-Ferretti, G.M., and A. Razin. 1996. “Current-Account Sustainability.”. In Princeton Studies in International Finance. 81. Princeton, New Jersey: Princeton University October.Search in Google Scholar

Obstfeld, M. (2012).NBER Working Paper No. 17877 Cambridge, MA: National Bureau of Economic Research Does the Current Account Still Matter?March.10.3386/w17877Search in Google Scholar

Obstfeld, M., and K. Rogoff. 1996. Foundations of International Macroeconomics. Cambridge, MA: MIT Press.Search in Google Scholar

Obstfeld, M., and K. Rogoff. 2007. “The Unsustainable U.S. Current Account Position Revisited.”. In Clarida, R.H. (Ed.), G7 Current Account Imbalances: Sustainability and Adjustment. 339–376. Chicago: The University of Chicago Press Chapter 9.10.7208/chicago/9780226107288.003.0010Search in Google Scholar

Otto, G 1992. “Testing a Present-Value Model of the Current Account: Evidence from US and Canadian Time Series.” Journal of International Money and Finance 11 (5): 414–430.10.1016/0261-5606(92)90009-MSearch in Google Scholar

Pedroni, P. 1999. “Critical Values for Cointegration Tests in Heterogeneous Panels With Multiple Regressors.” Oxford Bulletin of Economics & Statistics 61(4):653–670.10.1111/1468-0084.61.s1.14Search in Google Scholar

Pedroni, P 2000. “Fully Modified OLS for Heterogeneous Cointegrated Panels.”. In Baltagi, B.H., T.B. Fomby, and R.C. Hill (Eds.), Advances in Econometrics. Vol. 15, 93–130. Emerald.10.1016/S0731-9053(00)15004-2Search in Google Scholar

Pedroni, P 2001. “Purchasing Power Parity Tests in Cointegrated Panels.” The Review of Economics and Statistics 83 (4): 727–731.10.1162/003465301753237803Search in Google Scholar

Pedroni, P 2004. “Panel Cointegration: Asymptotic and Finite Sample Properties of Pooled Time Series Tests with an Application to the PPP Hypothesis.” Econometric Theory 20 (3): 597–625.10.1017/S0266466604203073Search in Google Scholar

Pedroni, P 2007. “Social Capital, Barriers to Production and Capital Shares: Implications for the Importance of Parameter Heterogeneity from a Nonstationary Panel Approach.” Journal of Applied Econometrics 22 (2): 429–451.10.1002/jae.948Search in Google Scholar

Pesaran, M.H., Y. Shin, and R.P. Smith. 1999. “Pooled Mean Group Estimation of Dynamic Heterogeneous Panels.” Journal of the American Statistical Association 94 (446): 621–634.10.1080/01621459.1999.10474156Search in Google Scholar

Phillips, P.C.B., and B.E. Hansen. 1990. “Statistical Inference in Instrumental Variables Regression with I(1) Processes.” The Review of Economic Studies 57 (189): 99–125.10.2307/2297545Search in Google Scholar

Phillips, P.C.B., and P. Perron. 1988. “Testing for a Unit Root in Time Series Regression.” Biometrika 75 (2): 335–346.10.1093/biomet/75.2.335Search in Google Scholar

Raybaudi, M., M. Sola, and F. Spagnolo. 2004. “Red Signals: Current Account Deficits and Sustainability.” Economics Letters 84 (2): 217–223.10.1016/j.econlet.2004.02.005Search in Google Scholar

Roubini, N., and P. Wachtel.. 1998. “Current Account Sustainability in Transition Economies.”. In NBER Working Paper No. 6468. Cambridge, MA: National Bureau of Economic Research March.10.3386/w6468Search in Google Scholar

Saikkonen, P 1991. “Asymptotically Efficient Estimation of Cointegration Regressions.” Econometric Theory 7 (1): 1–21.10.1017/S0266466600004217Search in Google Scholar

Sargan, J.D 1958. “The Estimation of Economic Relationships Using Instrumental Variables.” Econometrica 26 (3): 393–415.10.2307/1907619Search in Google Scholar

Sawada, Y 1994. “Are the Heavily Indebted Countries Solvent?: Tests of Intertemporal Borrowing Constraints.” Journal of Development Economics 45 (2): 325–337.10.1016/0304-3878(94)90036-1Search in Google Scholar

Stock, J.H., and M.W. Watson. 1993. “A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems.” Econometrica 61 (4): 783–820.10.2307/2951763Search in Google Scholar

Swamy, P.A.V.B 1970. “Efficient Inference in a Random Coefficient Regression Model.” Econometrica 38 (2): 311–323.10.2307/1913012Search in Google Scholar

Taylor, A.M 2002. “A Century of Current Account Dynamics.” Journal of International Money and Finance 21 (6): 725–748.10.1016/S0261-5606(02)00020-7Search in Google Scholar

Trehan, B., and C.E. Walsh. 1991. “Testing Intertemporal Budget Constraints: Theory and Applications to U.S. Federal Budget and Current Account Deficits.” Journal of Money, Credit and Banking 23 (2): 206–223.10.2307/1992777Search in Google Scholar

Wickens, M.R., and M. Uctum. 1993. “The Sustainability of Current Account Deficits: A Test of the US Intertemporal Budget Constraint.” Journal of Economic Dynamics and Control 17 (3): 423–441.10.1016/0165-1889(93)90005-DSearch in Google Scholar

Wu, J.-L 2000. “Mean Reversion of the Current Account: Evidence from the Panel Data Unit-Root Test.” Economics Letters 66 (2): 215–222.10.1016/S0165-1765(99)00198-6Search in Google Scholar

Wu, J.-L., S.-L. Chen, and H.-Y. Lee. 2001. “Are Current Account Deficits Sustainable? Evidence from Panel Cointegration.” Economics Letters 72 (2): 219–224.10.1016/S0165-1765(01)00420-7Search in Google Scholar

Wu, J.-L., S. Fountas, and S.-L. Chen. 1996. “Testing for the Sustainability of the Current Account Deficit in Two Industrial Countries.” Economics Letters 52 (2): 193–198.10.1016/S0165-1765(96)06860-7Search in Google Scholar

Published Online: 2017-9-1

© 2017 Walter de Gruyter GmbH, Berlin/Boston

Downloaded on 18.9.2025 from https://www.degruyterbrill.com/document/doi/10.1515/gej-2017-0069/html
Scroll to top button