Testing the intertemporal sustainability of current account in the presence of endogenous structural breaks: evidence from the top deficit countries

Abstract

We examine the sustainability of the current account (CA) deficits among the top deficit countries occurring consistently in the period after the global financial crisis period. Hence, we chose four developed economies, namely, Australia, Canada, the UK, and the US, and three emerging market economies, namely, Brazil, India, and Turkey. The results indicate that information about structural breaks, occurring around the GFC period, improves the cointegration results significantly. We find that five out of the seven countries, except Australia and the UK, exhibit sustainable CA deficits. Further, results with disaggregated CA indicates that the services account is sustainable in all countries while goods account is unsustainable in Australia, the UK, and India. Overall, our findings reveal the possibility of aggregation bias in affecting the CA sustainability results. Thus, CA deficits are not necessarily bad for an economy if it can generate sufficiently large future net export surpluses to pay its current net foreign outstanding debt.