Modeling of current account and its sustainability in a case of the Czech Republic

In this paper I first discuss the group of potential determinants of current account development according to surveyed empirical and theoretical literature. In this respect I strive to introduce several alternatives of each variable effect on current account if it is possible. I follow with the formation of the current account model suitable for the Czech Republic. Estimating the model, I employ cointegration techniques ADL and JOH as vast majority of variables in this model is integrated of order I(1). I find significant and robust influence of the domestic economic growth, the stages of development hypothesis, the degree of openness of the economy and terms of trade on balance of current account. Further, I apply the logic of standard test of stability to analyze the notion of sustainability of current account deficit in the case of the Czech Republic in a context of time series.

Keywords: current account, sustainability, cointegration, intertemporal approach, determinants of current account, tests of stability