Current Account Sustainability. A Non Linear Approach. The Cases of Germany, China, and the USA

This paper examines the sustainability of the current account balances for three leading economies that play significant roles in global financial and geopolitical developments: China, the US, and Germany. Specifically, the alignment of the US, German, and Chinese current accounts with their intertemporal budget constraints is analyzed. The stationarity of the current account is considered a sufficient condition for defining sustainability. However, it is argued that the common assumption of a linear process for the current account under the alternative hypothesis of stationarity may not accurately reflect reality, as the current account may exhibit nonlinear behavior. Therefore, both linear and nonlinear unit root tests are employed to investigate current account sustainability. The objective is to determine whether the current account balances of China, Germany, and the US are sustainable independently or if achieving sustainability necessitates government intervention.