Current account sustainability: A non-linear comparative empirical overview

Abstract

This study aims to examine the sustainability of current account deficits for Hungary, Poland, Czech Republic and Turkey over the period 1998Q1:2014Q2, with a special attention to the Turkish case, by applying the theoretical model of Steven Husted (1992). The main motive for the choice of time span is that the period comprises the outcomes of two important crises Turkish economy experienced in 2001 and 2008. The empirical testing procedure of the sustainability is twofold so as to be linear and non-linear. Both linear and non-linear test results provide evidence that the current account deficit is unsustainable for Turkey, Poland and Czech Republic. On the other hand, linear and non-linear test results lead to a conflicting evidence for Hungary. We conclude that there is a need to reduce the current account deficit for the countries examined. Otherwise, a sharp adjustment may be inevitable.

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“…They should stimulate the competitiveness of the goods and services on the international markets. According to Iyidogan and Turan (2018), more saving friendly policies would be helpful in addressing this structural problem.…”

“…Afonso et al (2017) assesses the sustainability of the CA balance and external debt in a sample of EU countries and find that sustainability is not rejected for Austria, Belgium, Denmark, Estonia, and Germany and that there is concern about the sustainability of external debt in Latvia, Greece, Portugal, Romania, Estonia, and Lithuania. Iyidogan and Turan (2018) found that in Turkey, Poland and the Czech Republic CA deficit is not sustainable, whereas in Hungary the results are mixed.…”

The sustainability of the Turkish current account: Smooth structural break and asymmetric adjustments

“…Topalli and Dogan (2016) estimate two‐regime Markov switching regression model between exports and imports of Turkey and find weak form of sustainability of the current account over the period 1990Q1‐2014Q2. Iyidoğan and Turan (2018) test cointegration relationship between imports and exports of Turkey using Gregory–Hansen and Seo (2006) cointegration methods and find no evidence of sustainability for the Turkish current account deficit over the period 1998Q1‐2014Q2. Furthermore, many researchers analyse the sustainability of the Turkish current account by using current account to GDP ratio which allows for more comprehensive findings.…”