Are Asian countries current accounts sustainable? Deficits, even when associated with high investment, are not costless

Abstract

Determining whether a country's current account is "sustainable" is not an easy task, as the notion of sustainability is related to complex macroeconomic and political-economy issues, but it is critical. Whether or not one finds empirical Support for sustainability is related to the econometric technique employed: conventional Unit-root tests typically fail to reject the existence of a unit root in the current-account imbalances of our sample of five crisis-affected Asian countries. However, using nonlinear unit-root tests we reject the existence of a unit root in favour of nonlinear mean reversion. Thus, contrary to what some others have claimed, the Asian crisis was not caused by these countries' current-account deficits, as their current accounts were on sustainable paths. We thus reject the existence of any threshold in current-account adjustment. These results also provide support for the intertemporal approach to the current account. In addition. we find that dramatic improvements in these countries' current-account deficits around 1998 were caused by sharp real depreciations of their currencies. Finally, we provide some policy implications and recommendations. (C) 2008 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.