Is There a Non-Zero Stable Component in the Eurozone’s External Balances?

Abstract

We consider the potential presence of a structural component in the external balance of 12 Eurozone countries. To this aim, we define the Structural Component of the External Balance as the unobservable part of the external balance that is stable or evolves slowly and around which fluctuations occur with a potentially cyclical origin that are corrected in the shortterm. We propose a methodology for obtaining the Structural Component of the External Balance by decomposing the external balance using breakpoint tests, and we contrast this methodology against other methods widely used in the economic literature. Moreover, we investigate the factors that determine the Structural Component of the External Balance of Eurozone countries. According to our results, Belgium, Germany, Luxembourg, and the Netherlands have a structural and persistent surplus, whereas Greece, Portugal, and Spain have structural deficits. Furthermore, our results indicate that export specialization, financial openness, and a government deficit/surplus are the key variables explaining the Structural Component of the External Balance. JEL Classifications: F15, F32, F36

Twin deficits through the looking glass: time-varying analysis in the Euro area

“…Chinn and Prasad (2003), Cheung et al (2013) and Altayligil and Çetrez (2020) assert that the government balance is an explanatory factor for the current account balance, together with other explanatory factors, for large country panels. Carrasco (2018) investigates the factors that determine the structural component of the current account balance for 12 Eurozone countries between 1960 and 2014. The public account balance appears as one of the main explanatory variables of the structural component of the current account balance, such as in Cheung et al (2013).…”

“…While the Netherlands and Germany registered significant external surpluses, Portugal and Greece had substantial external deficits, with values outside the range defined in the Excessive Macroeconomic Imbalances Procedure (MIP) from European Commission, i. e., between − 4 and 6% of GDP for the current account balance. In this regard, Carrasco (2018) concludes that countries such as Belgium, Germany, Luxembourg, and the Netherlands have structural external surpluses, whereas Greece, Portugal and Spain have structural external deficits. Afonso and Jalles (2018) report a negative effect of the Global Financial Crisis on the cyclical component of the current account balance for Italy, Ireland, Portugal, Spain, and Latvia.…”

Twin Deficits Through the Looking Glass: Time-Varying Analysis in the Euro Area

“…Chinn and Prasad (2003), Cheung et al (2013) and Altayligil and Çetrez (2020) assert that the government balance is an explanatory factor for the current account balance, together with other explanatory factors, for large country panels. Carrasco (2018) investigates the factors that determine the structural component of the current account balance for 12 Eurozone countries between 1960 and 2014. The public account balance appears as one of the main explanatory variables of the structural component of the current account balance, such as in Cheung et al (2013).…”

“…While the Netherlands and Germany registered significant external surpluses, Portugal and Greece had substantial external deficits, with values outside the range defined in the Excessive Macroeconomic Imbalances Procedure (MIP) from European Commission, i. e., between -4 and 6% of GDP for the current account balance. In this regard, Carrasco (2018) concludes that countries such as Belgium, Germany, Luxembourg, and the Netherlands have structural external surpluses, whereas Greece, Portugal and Spain have structural external deficits. Afonso and Jalles (2018) report a negative effect of the Global Financial Crisis on the cyclical component of the current account for Italy, Ireland, Portugal, Spain, and Latvia.…”