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Current Account Deficits in the Euro Area. The End of the Feldstein Horioka Puzzle?

Olivier J. Blanchard
Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Francesco Giavazzi
University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

September 17, 2002

MIT Department of Economics Working Paper No. 03-05

Abstract:
Both Portugal and Greece have been running large current account deficits, and these are expected to continue in the future. Yet, financial markets do not appear to be worried. Starting from this observation, we document that Portugal and Greece are in fact representative of a broader evolution: Increasing goods and financial market integration is leading to an increasing decoupling of saving and investment within the European Union, and even more so within the Euro area. In particular, it is allowing poorer countries to invest more, save less, and run larger current account deficits. The converse holds for the richer countries.

Keywords: Current Account, Europe, Euro, Feldstein Horioka Puzzle, Saving, Investment, Capital Market Integration, Product Market Integration

JEL Classifications: F32, F36, F41, F43

Working Paper Series

Date posted: January 23, 2003 ; Last revised: February 27, 2003

Suggested Citation

Blanchard, Olivier J. and Giavazzi, Francesco, Current Account Deficits in the Euro Area. The End of the Feldstein Horioka Puzzle? (September 17, 2002). MIT Department of Economics Working Paper No. 03-05. Available at SSRN: http://ssrn.com/abstract=372880 or doi:10.2139/ssrn.372880

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Olivier J. Blanchard (Contact Author) Massachusetts Institute of Technology (MIT) - Department of Economics ( email ) Room E52-357 50 Memorial Drive Cambridge, MA 02142 United States 617-253-8891 (Phone) 617-253-4096 (Fax) HOME PAGE: http://mit.edu/blanchar/www/
National Bureau of Economic Research (NBER) 1050 Massachusetts Avenue Cambridge, MA 02138 United States
Francesco Giavazzi University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) ( email ) Via Salasco 5 20136 Milan Italy +39 02 5836 3304 (Phone) +39 02 5836 3302 (Fax)
National Bureau of Economic Research (NBER) 1050 Massachusetts Avenue Cambridge, MA 02138 United States
Centre for Economic Policy Research (CEPR) 90-98 Goswell Road London EC1V 7RR United Kingdom

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