Red signals: Current account deficits and sustainability

This paper proposes a method to asses the potential problems of sustainability of a country's sovereign debt. We claim that the relevant variables used for this analysis are typically subject to changes that are associated with changes in macroeconomics policies. We propose a procedure for identifying periods under which the current account accumulates at a non-stationary rate. Our approach is based on imposing identifying restrictions on Markov switching type models. Empirical applications of the procedure to Argentina, Brazil, Japan, UK and USA are examined and discussed. © 2004 Elsevier B.V. All rights reserved.