The determinants of current account imbalances in the euro area: a panel estimation approach (original) (raw)
Related papers
Current account imbalances in the euro area
Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 2013
While the current account balance for the euro area as a whole has been in balance, divergences in current account positions among the euro-area members have widened since the introduction of the common currency euro. During the last 13 years Portugal, Greece and Spain have run large and persistent current account deficits, whereas Luxembourg, the Netherlands, Finland or Germany have displayed during the same period large and persistent surpluses. However, there is no unambiguous agreement among economists, whether this divergence of current account positions of the euro-area countries mirrors growing intra-euro-area imbalances (Gros, 2012) or just reflects proper functioning of the European integration process (Schmitz and von Hagen, 2009). Therefore, the aim of this paper is to estimate equilibrium current account position for each of the original 12 euro area countries so that it is possible to assess whether the divergence of intra-euro current account balances could be explaine...
Current Account Imbalances and the Euro Area. Alternative Views
SSRN Electronic Journal, 2019
The critical role of current account imbalances (CAI) is widely shared in the consensus narratives of the European crisis that followed the Great Recession. On the basis of this interpretation, new EU initiatives raised, in particular the so-called "Six Pack" adoption in 2011 and the establishment of the European Semester procedure to improve policy coordination in the EU beyond fiscal matters. This package includes the Macroeconomic Imbalances Procedure (MIP) that broadens the EU economic governance framework to include the surveillance of unsustainable macroeconomic trends. Although the widening of the CAI in the Euro Area is a matter of fact, and the consensus narrative contains elements of truth, alternative views have been put forward on mainly three issues: i) their relevance, ii) their causes and connection with the crisis, and iii) their policy implications. The aim of this paper is to examine these controversial points about the causes, meaning and consequences of CAI, and discuss the alternative policy prescriptions that emerge.
Current account balances and structural adjustment in the euro area
International Economics and Economic Policy, 2010
In the past decade, a set of euro area countries has accumulated large current account defi cits. After a brief relaxation of the euro area internal imbalances in the wake of the fi nancial crisis, it appears as if this pattern arises anew when times normalize again and Germany still sticks to export-led growth. This issue has been labelled one of the most challenging economic policy issues for Europe inter alia by the European Commission and some other players on the EU level. In this paper, we analyse the role of private restructuring and structural reforms for the urgently needed sustainable readjustment of intra-euro area current account balances. A panel regression reveals a signifi cant impact of structural reforms on intra-euro area current account balances. This implies that in particular structural reforms and wage restraint in notorious current account and budget defi cit countries such as Greece are highly suitable to support long-term economic stability in Europe.
Evolution of Current Account Imbalances in the Euro Area
This study provides an overview of the evolution of external imbalances in the Euro Area. It also aims to provide a basis for explaining divergence from desired outcomes and to explore root causes for unstable economic performance in some of its economies. We present data and analyze the vulnerabilities of countries suffering from external imbalances. Eventually, we observe that some of these economies resulted to volatile macroeconomic circumstances as in the emerging market economies, and some others have been involved in excessive surplus. While we emphasize the role of the ECB, we argue that free private capital flows should provide the necessary financing when governments follow policies consistent with forward-looking expectations of the global investors.
Available at SSRN 2016127, 2012
The paper discusses the seriousness of current account imbalances in the last few decades in Europe, with a particular focus on the European Monetary Union. A closer look at the development of current accounts in European economies suggests the existence of some serious structural problems that might jeopardize economic performance of single countries, but even more importantly, of the entire monetary union. Although current account positions have been subject of numerous research projects till now, scarce interest has been offered regarding specifically the situation in the member states of the euro area and in the euro candidate countries. This lack of interest could be justified among others with the myopic conviction expressed in the literature that current account positions become irrelevant in a monetary union. Instead, there are conceptual reasons to be worried about external imbalances in a currency area, and particularly, in the current as well as potentially enlarged EMU.
Current Account Imbalances and Financial Integration in the Euro Area
RePEc: Research Papers in Economics, 2009
While the current account of euro area as a whole has remained almost balanced in the past two decades, several member countries have sizeable deficits or surpluses. In this paper, we interpret these imbalances as indicators of net capital flows among the euro-area countries and show that these net flows follow differences in per-capita incomes. Our results show that the elasticity with respect to per-capita incomes of net capital flows between euro-area countries and the euro area has increased. This is not the case for net capital flows between non-euro area countries and the euro area, nor for euro-area countries and the rest of the world. We interpret this as evidence for increasing financial integration in the euro area. There is also some evidence suggesting that the introduction of the euro has lead to some financial diversion.
Current account imbalances in the Euro area: Competitiveness or financial cycle?
DNB Working Paper n.443, 2014
The current account imbalances that are at the heart of the European sovereign debt crisis are often attributed to differences in price competitiveness. However, recent research suggests that domestic demand booms related to the financial cycle may have been more important. As this would have very different policy implications, this paper aims to investigate the relative role of price competitiveness and domestic demand as drivers of the current account imbalances in the euro area. We estimate panel error-correction models for exports, imports and the trade balance. We specifically look at fluctuations in domestic demand at the frequency of the financial cycle. We conclude that although differences in price competitiveness have an influence, differences in domestic demand are more important than is often realized. Fluctuations at the frequency of the financial cycle are more suitable to explain the trade balance than fluctuations at the frequency of the normal business cycle. Our results call for more emphasis on credit growth and macro prudential policy, in addition to the current attention for competitiveness and structural reforms.
Long-run determinants of current accounts in OECD countries: Lessons for intra-European imbalances
Economic Modelling, 2014
Global and euro area external imbalances adjustment Panel cointegration test Linear and asymmetric panel VECM In this paper we study the long-run determinants of current account balances in 21 OECD countries. We define long-run targets to determine whether actual current account balances are in line with their equilibrium values and find that, following the crisis, the United States, Japan and Spain returned towards their targets but that much remains to be done in Austria, Greece and Germany. Using linear and asymmetric panel VECM models, we find that the speed of convergence of external imbalances is much faster in deficit countries than in surplus ones. These results suggest that the adjustment of intra-European imbalances has to take place in both surplus and deficit countries and should be particularly substantial in the former. This revived the old debate of how to get the surplus countries to adjust.
2009
This paper considers the major determinants of the current account in the new members of the EU. It examines the long-run and short-run impact of real exchange rate, investment, private and public savings on current account. The bounds testing autoregressive distributed lag (ARDL) approach to cointegration is used and the results indicate that twin deficit exists; in another words, government budget deficit shocks have led to deficit in current accounts in Czech Republic, Latvia, Lithuania, Slovenia and Slovakia for the considered period. At the same time, empirical evidence was found that private savings, investment and real exchange rate are key variables as well, causing changes in the current account in the long-run as well as in the short-run. Finally, stability tests were applied to the model indicating no evidence of any structural instability in the model of these countries.
Current Accounts in the Euro Area: An Intertemporal Approach
SSRN Electronic Journal, 2000
This paper uses an intertemporal model of the current account to evaluate the fluctuations in current account balances experienced by Euro area countries over the last three decades. In the model current account balances are used to smooth consumption and they are driven by expectations about future income and relative prices. This simple model is not rejected for six (Belgium, France, Italy, Netherlands, Portugal, and Spain) of the ten Euro area countries examined, although the model tends to underestimate their current account volatility.