Current accounts in the euro area: An intertemporal approach

Abstract

JEL classification: F32 F41Keywords: Current account Euro area Present value model Financial integration a b s t r a c t Current accounts have diverged substantially among euro area countries since the creation of the euro. This divergence has raised concerns about the sustainability of some member countries' external indebtedness. This paper uses an intertemporal model of the current account to analyze the fluctuations in current account balances experienced by euro area countries over the last three decades and to disentangle its determinants. We find that the model is not rejected for six of the ten euro area countries examined (Belgium, France, Italy, Netherlands, Portugal and Spain), although it tends to underestimate their current account volatility. For these countries, we derive the expectations about future income and relative prices, which, according to the model, underlie their current account balances. Expectations about future growth increased in all Southern European countries at the creation of the euro, but they diverged considerably by 2005. While in Portugal these expectations were below its historical mean by then, in Spain they were at an historical high.

Estimating the effect of the EMU on current account balances: A synthetic control approach

“…More specifically, I use macroeconomic data from OECD countries and a counterfactuals-based approach-the synthetic control method-to estimate the causal effect of the EMU on the current account balances of individual member states. This paper contributes to the empirical literature on the effect of EMU on current account balances, which has yet to come to a consensus about whether the imbalances were caused by the EMU (Belke and Dreger, 2013;Campa and Gavilan, 2011;Schmitz and von Hagen, 2011) or by factors external to the currency union (Chen et al, 2013;Guerrieri and Esposito, 2013). The synthetic control approach is ideally suited to fill this Policymakers in the euro area have started to pay more attention to external imbalances in the wake of the euro crisis.…”

Drivers of European Transition Countries’ External Current Accounts: An LSDVC Approach

“…From a geographical perspective, the academic literature on current account deficits has been primarily concerned with the sizable and persistent external imbalances of the United States (e.g., Chakraborty and Dekle 2009;Duncan 2015;Ivanova 2010;Kim and Roubini 2008;Mussa 2007;Sooreea and Wheeler 2010) and of the euro area (e.g., Blanchard and Giavazzi 2002;Brissimis et al 2013;Campa and Gavilan 2011;Ca'Zorzi and Rubaszek 2012;Chen, Milesi-Ferretti, and Tressel 2013;Di Mauro and Pappada 2014;Hobza and Zeugner 2014;Körner and Zemanek 2013;Lane and Milesi-Ferretti 2007). Due to their minuscule geopolitical importance, very little academic attention has been devoted to the European transition countries (e.g., Aristovnik 2006Aristovnik , 2008Bussière, Fratzscher, and Müller 2006).…”

And then current accounts (over)adjusted

“…To identify a wide range of possible theoretical determinants of medium-term current account variation we build upon the studies of Debelle and Faruque (1996), Calderon et al (2002), Chinn and Prasad (2003), Doisy and Hervé (2003), Bussière et al (2006), Zanghieri (2004), Gruber and Kamin (2005), Hermann and Jochem (2005), Aristovnik (2006), Campa and Gavilan (2007), IMF (2006), De Santis and Lührmann (2008), Rahman (2008) and others. This literature suggested a number of possible key determinants which we now outline.…”