「FEEL」 Kim, B., Min, H., Hwang, Y., and McDonald, J. (2009), “Are Asian Countries’ Current Account Sustainable?: A Non-linear Unit Root Test”, Journal of Policy Modeling, Vol. 31, No. 2, pp. 163-179.
Lab: Financial Economics and Engineering Lab.
Professor: Hong-Ghi Min
Title: Are Asian countries’ current accounts sustainable? Deficits, even when associated with high investment, are not costless
Authors: Bong-Han Kim, Hong-Ghi Min, Young-Soon Hwang, Judith A. McDonald
Journal: Journal of Policy Modeling
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.
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