Mean reversion of the current account: evidence from the panel data unit-root test

Theoretically, the modern intertemporal model of current account determination implies the stationarity of the current account. However, the empirical finding in the literature indicates nonstationary current account balances based on conventional unit-root tests. Applying the panel data unit-root test of Lm, Pesaran and Shin, we find support for the mean-reverting property of the current account. This, in turn, lends support to the intertemporal approach to the current account. The policy implication of our findings is that current account deficits in major industrial countries are sustainable. (C) 2000 Elsevier Science S.A. All rights reserved.