This paper proposes a method to asses the potential problems of sustainability of a country’s
sovereign debt. We claim that the relevant variables used for this analysis are typically subject to
changes which are associated with changes in macroeconomics policies. We propose a procedure
for identifying periods under which the trade deficit and the current account accumulate at a nonstationary
rate. Our approach is based on imposing identifying restrictions on Markov switching
type models. An empirical application of the procedure to UK data is examined and discussed.
We find that periods of non-stationary trade deficits typically coincide with current account crises
