Revisiting the sustainability of current account deficit: SPSM using the panel KSS Test with a Fourier Function

This study applies the Sequential Panel Selection Method (SPSM) to test the mean reversion properties in the current account balance as percentages of GDP for the ten OECD countries (Australia, Canada, Finland, Germany, Korea, Mexico, Norway, Switzerland, United Kingdom and United States) over the span of 1981Q1– 2010Q4. SPSM classifies the whole panel into a group of stationary countries and a group of non-stationary countries. In doing so, we can clearly identify how many and which series in the panel are stationary processes. Our empirical results indicate that the mean reversion holds true for most of the OECD countries, with the exception of Germany, the United Kingdom and the United States. Our results have important economic implications for the ten OECD countries.