And then current accounts (over)adjusted

Abstract

The global financial turmoil has led to an unprecedented current account adjustment in central and eastern Europe. This article investigates this issue by revisiting two approaches. The first is the current account literature based on panel econometric techniques. This article adds to the literature by showing that, although there is a large degree of parameter uncertainty associated with the choice of determinants, the implied current account benchmarks for central and eastern Europe are in a narrow range. The second approach is the external sustainability framework where we extend the analysis to take into account the importance of FDI financing. We find that both approaches point to similar conclusions on which countries were in need of a current account adjustment in central and eastern Europe in 2007. The turmoil in financial markets in 2008 set this adjustment in motion.Keywords Current account · Financial flows · Central and eastern Europe · Panel data · Model uncertainty · External sustainability JEL Classification C33 · F15 · F32 · F34 · O52

On the Empirical Evidence of the Intertemporal Current Account Model for the Euro Area Countries

“…The second strand of the literature applied standard econometric techniques to establish if there is a long‐term relationship between the current account and standard macroeconomic fundamentals, such as relative gross domestic product (GDP) per capita, the demographic structure or fiscal policy. The studies by Chinn and Prasad (2003), Chinn and Ito (2008) or Ca' Zorzi et al (2011) generally confirmed some of the ICA model implications; in particular, that there is a significant and positive relationship between the current account and GDP per capita across countries. The third group of articles applies general equilibrium models to explain the qualitative features of current account developments seen in Europe.…”

The impact of financial regulation on current account balances

“…Ideally, one would consider a more general setting in which each indicator is transformed into three dummy variables, one for each possible value of the indicator. 18 However, the limitation N < k discussed in Section 4.3.3 precludes us from considering this non-linear specification within the BMA framework because it would imply than the number of regressors is larger than the number of countries.…”

“…18 Note that each indicator takes four possible values, from 0 to 3, but one should define an omitted category to avoid collinearity.…”

The Impact of Financial (De)Regulation on Current Account Balances

“…18 We consider the means over time in the spirit of Mundlak (1978) instead of the full vector of time-series observationsà la Chamberlain to avoid the proliferation of coefficients. 19 On the other hand, while this represents a strong assumption in the case of the lagged dependent variable, it is also a concern for the case of the remaining right-hand-side variables; however, the literature typically assumes exogeneity of the potential CA determinants (see e.g.…”