Friday, 16 March 2018: 9:50 AM
Current account sustainability is a widely researched area in international macroeconomics. Ex ante solvency is used as the relevant criteria in assessing current account sustainability. Milles- Ferretti and Razin (1996) point out that there are two main reasons for a country to be insolvent. First, the country cannot create considerable trade surpluses. Second, the country is not willing to pay its external debts even if it has trade surpluses (Milles- Ferretti and Razin, 1996). In this study, we focus on the first assumption which is on the inability of the country to pay its debts due to the lack of trade surplus. This study examines the current account sustainability of BRICS countries namely Brazil, Russia, India, China and South Africa. For this study, we employ a wide range of univariate and panel nonlinear unit root tests for detecting the presence of structural break. Specifically, the structural break type a) nonlinearity, b) size nonlinearity, c) sign nonlinearity, d) size and sign nonlinearity, e) size and sign nonlinearities with structural break and f) size nonlinearity with structural break are analysed separately. Therefore, we are able to explain the sustainability of current account imbalances by using variety of unit root tests. The univariate unit root test results indicate that the prevailing data structure among BRICS countries is shaped by the structural breaks rather than a state dependent nonlinearity. The results of nonlinear panel unit root tests show us that the threshold Autoregressive (TAR) type of nonlinearity with structural break is the best performing tests for BRICS countries.
In this study, the current account sustainability of BRICS countries was analyzed by using quarterly data on current account balance (as a percentage of GDP). The time period of the study is between Q1:1999 and Q1: 2017.