Current account deficits and sustainability: Evidence from the OECD countries

Whether or not a current account deficit sustainable has important implications for policy. If the current account deficits of a nation is sustainable, then it implies that the government should have no incentive to default on its international debt. In this article we examine whether or not the current account deficits for the OECD countries can be characterized by a unit root process with regime switching. The econometric methodology allows us to distinguish periods that are associated with unsustainable outcomes from those in which the intertemporal national long-run budget constraint (LRBC) holds. Among the main results, it is found that it is very likely that the LRBC will not hold for the Australia, the Czech Republic, Finland, Hungary, New Zealand, Portugal or Spain, thus signifying a red signal that the current account deficits observed during the period were probably not on a sustainable path.