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Title: Red Signals: Trade Deficits and the Current Account
Authors: Raybaudi, M
Sola, M
Spagnolo, F
Keywords: Deficits Sustainability; Markov Switching ADF.
Issue Date: 2003
Publisher: Brunel University
Citation: Economics and Finance Working papers, Brunel University, 03-14
Abstract: This paper proposes a method to asses the potential problems of sustainability of a country’s sovereign debt. We claim that the relevant variables used for this analysis are typically subject to changes which are associated with changes in macroeconomics policies. We propose a procedure for identifying periods under which the trade deficit and the current account accumulate at a nonstationary rate. Our approach is based on imposing identifying restrictions on Markov switching type models. An empirical application of the procedure to UK data is examined and discussed. We find that periods of non-stationary trade deficits typically coincide with current account crises.
Appears in Collections:Dept of Economics and Finance Research Papers

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