Sustainability of the Current Account in Developing Countries: A Fourier Wavelet-Based Unit Root Test

Abstract

The sustainability of the current account balance for five fragile economies—Brazil, Argentina, South Africa, India, and Türkiye (namely, BASIT)—is investigated. These countries’ economies operate under a time current account deficit almost all the time, a condition that causes fragility to external shocks; the following fallout from these shocks may risk not only the domestic economy but also the international economy, such as by clogging trade and income distribution. In this study, the sustainability of the current account in BASIT countries is examined via wavelet-based Kapetanios, Shin and Snell (WKSS) and Fourier wavelet-based KSS (FWKSS) unit root tests, in conjunction with linear unit root tests. Even though traditional unit root tests generally support the sustainability of a current account deficit for all countries, a non-linear unit roots test confirms the traditional tests for only India and South Africa. Results from the wavelet transform of non-linear unit root tests indicate the unsustainability of the current account balance, except in the case Türkiye. Moreover, the FWKSS test confirms WKSS.