Testing the Current Account Sustainability for BRICS Countries: Evidence from a Nonlinear Framework

Abstract

This study investigates the current account sustainability hypothesis for Brazil, Russia, India, China and South Africa (BRICS). For this purpose, a linear and a variety of nonlinear unit root tests have been applied to the current account to GDP ratios of the aforementioned countries. The study empirically shows that the current account sustainability for BRICS cannot be provided without taking into consideration the time dependent nonlinearity (i.e. structural break(s)). Besides, the current account sustainability of India and Russia can be provided by using state dependent nonlinearity and time and state dependent nonlinearity simultaneously, respectively. Furthermore, by using one of the newly developed time dependent nonlinear unit root tests, we find evidence of the fast adjustment to the equilibrium of China's relevant data. That could be an indicator of the strength of the Chinese economy. Thus, it can be concluded that neglecting the nonlinearities in the relevant data testing process leads to misleading results in the testing process of the current account sustainability hypothesis.