Long memory and regime switching properties of current account deficits in the US

Chen (2011) [Are current account deficits really sustainable in the G-7 countries? Japan and the World Economy, 23(3), 190–201.] examines whether or not the current account deficits of the US can be characterized by a unit root process with regime switching (MS-ADF). In this paper, we find that, if the empirical sample ends in 2008:Q4, the estimates obtained from the Markov switching unit root regression retain a reasonable two-state classification. If the sample is extended to 2009:Q1 or beyond, then the estimates of the Markov switching unit root regression become quite unreasonable and it is difficult to explain the results. We also find that this contradictory phenomenon can be resolved by estimating the Markov switching autoregressive fractionally integrated moving average model (MS-ARFIMA) proposed by Tsay and Härdle (2009) [A generalized ARFIMA process with Markov-switching fractional differencing parameter, Journal of Statistical Computation and Simulation, 79, 731–745.]. The estimates of the MS-ADF and MS-ARFIMA models show that there is a red signal that the current account deficits observed during the period were probably not on a sustainable path.