Sustainability of current account deficits: Evidence from Egypt using an asymmetric ARDL model

Abstract

In this paper, we investigate the sustainability of the current account deficits using an asymmetric cointegration approach, with an application to Egypt. We assess the mean-reversion properties of the current account by examining the long-run relationship between real exports and real imports, plus interest payments on external debt. We use the asymmetric autoregressive distributed lag model to assess their long-run relationship and compare the results with those of the linear ARDL model. The results of the linear ARDL model suggest that there is no strong evidence to support the sustainability of the current account during the period of study. However, the results with the asymmetric model point toward the rejection of the null hypothesis of no cointegration between the two variables. Moreover, we reject the null hypothesis of no long-run asymmetry between the impacts of positive and negative shocks to imports on exports. Overall, our results suggest that the current account followed a mean-reverting nonlinear process during the study period.