CURRENT ACCOUNT DEFICIT SUSTAINABILITY IN TRANSITION COUNTRIES

Abstract

The current account balance represents the most important measurement of acountry's economic performance and it is important to keep the current account deficit within sustainable levels. Over the last decade, the importance of asustainable current account deficit has been major concern of policy makers and investors. In this paper, we investigate the sustainability of the current account deficit in transition countries over the period from 1995:01 through 2011:03, using intertemporal solvency model. According to this approach, the existence of aco integrating relationship between exports and imports + (including imports, netinterest payments and net transfer payments) gives that countries do not violate their intertemporal budget constraint. To achieve our objective, the cointegration test which recently developed in the presence of two potentially unknown structural breaks, is carried out. These breaks are taken into account in our analysis by considering that the long run relationship between related series might change andthe shifts can occur in the cointegrating vector. The obtained results suggest that there is evidence of cointegration for selected transition countries, implying sustainability.