Current account sustainability in advanced economies

This paper investigates the sustainability of current accounts in advanced economies, using a panel of 27 countries and annual data over the 1980-2008 period. Relying on various panel unit root tests and the sequential panel selection method proposed by Chortareas and Kapetanios (2009), we find strong evidence in favour of nonlinear but stationary current account trajectories only for 7 countries, while the remaining 20 appear to be nonstationary and thus unsustainable. Our analysis indicates that careful empirical modelling of current account dynamics, particularly in relation to cross-section dependence and nonlinear behaviour, is crucial for appropriate economic policymaking.