ARE THE CURRENT ACCOUNT IMBALANCES BETWEEN EMU COUNTRIES SUSTAINABLE? EVIDENCE FROM PARAMETRIC AND NON-PARAMETRIC TESTS
Article first published online: 25 JUL 2012
Copyright © 2012 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 28, Issue 7, pages 1179–1204, November/December 2013
How to Cite
Schoder, C., Proaño, C. R. and Semmler, W. (2013), ARE THE CURRENT ACCOUNT IMBALANCES BETWEEN EMU COUNTRIES SUSTAINABLE? EVIDENCE FROM PARAMETRIC AND NON-PARAMETRIC TESTS. J. Appl. Econ., 28: 1179–1204. doi: 10.1002/jae.2291
- Issue published online: 25 NOV 2013
- Article first published online: 25 JUL 2012
- Manuscript Revised: 23 APR 2012
- Manuscript Received: 25 JUL 2011
Using parametric and non-parametric estimation techniques, we analyze the sustainability of the recently growing current account imbalances in the euro area and test whether the European Monetary Union has aggravated these imbalances. Two alternative criteria for the assessment of external debt sustainability are considered: one based on the transversality condition of intertemporal optimization, and the other based on the stationarity properties of the stochastic process of the debt–GDP ratio. Econometric sustainability tests are performed using the pooled mean-group estimator and panel unit root tests, respectively. Variants of both test procedures with varying coefficients using penalized splines estimation are applied. We find empirical evidence suggesting that the introduction of the euro is associated with a regime shift from sustainability to unsustainability of external debt accumulation for the euro area. Copyright © 2012 John Wiley & Sons, Ltd.