Examining The Sustainability Of The Current Account Balance Using A Probability Approach

This dissertation examines the sustainability of current account deficits through a probabilistic lens, challenging the intertemporal solvency framework which assumes perfect foresight and complete markets. The intertemporal solvency framework defines current account sustainability as a country’s ability to generate future trade surpluses sufficient to meet external obligations. However, this assumption neglects the pervasive role of economic uncertainty. In response, this thesis redefines sustainability as a probabilistic concept—measured by the likelihood that future current account balances remain below a specified threshold—thus offering a more realistic and dynamic assessment. This proposed novel probability approach is based on a forecasting exercise. Therefore, our contribution is primarily empirical rather than theoretical. The research employs several stochastic forecasting models, including autoregressive model, vector autoregression, vector error correction model, bayesian vector autoregression and bayesian time-varying coefficient, applied to a diverse set of countries and data from 1980 to 2023. It examines the macroeconomic and global determinants of current account reversals and their implications for economic growth. The findings reveal that global factors—particularly U.S. real interest rates and world economic growth—are significant predictors of reversals. Moreover, the severity of growth effects from reversals is shown to depend on pre-existing macroeconomic conditions, like the gross domestic product growth rate, strength of the exchange rate and fiscal discipline. The proposed probabilistic framework demonstrates strong predictive accuracy, successfully identifying unsustainable deficits and providing early warning signals. We further find that the unsustainability risk does not relate to whether the government or the private sector is the main driver of the current account balance. Our model further demonstrates responsiveness to short-term volatility, thereby offering a valuable complement to structural assessments such as the International Monetary Fund-External Balance Assessment. This work contributes to literature by integrating uncertainty into sustainability analysis and has practical relevance for policy design, including trade strategy and international coordination. It highlights embedding sustainability metrics into trade policy frameworks to ensure long-term external sector stability.

Name dc:type.qualificationname

phd

Level dc:type.qualificationlevel

doctoral

Grantor dc:publisher.institution

Budapesti Corvinus Egyetem

Year dc:date.issued

2025

Author dc:creator

• Ndzama, Nwabisa Florence

• Közgazdasági elméletek

Language dc:language

en