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

27 Pages Posted: 21 May 2008

See all articles by Michele Ca' Zorzi

Michele Ca' Zorzi

European Central Bank (ECB)

Michał Rubaszek

National Bank of Poland; Warsaw School of Economics (SGH)

Date Written: May 2008

Abstract

In this paper we present a novel approach to the empirical validation of the intertemporal approach to the current account. We develop a calibrated model highlighting the role of consumption smoothing and capital accumulation in the economic convergence process. After solving the model, we derive the theoretical values for the euro area countries' current account, testing to what extent they match reality. The model explains most of the dispersion in the current account and saving ratio, though cannot equally well capture differences in the investment ratios. The conclusion that we draw is that consumption smoothing, based on expectations of economic convergence, is driving the current account of the euro area countries over medium-term horizons. Capital accumulation appears to play a less pronounced role.

Keywords: General equilibrium models, intertemporal optimisation, current account, euro area

JEL Classification: D91, F36, F41

Suggested Citation

Ca' Zorzi, Michele and Rubaszek, Michal, On the Empirical Evidence of the Intertemporal Current Account Model for the Euro Area Countries (May 2008). ECB Working Paper No. 895. Available at SSRN: https://ssrn.com/abstract=1120701

Michele Ca' Zorzi (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Michal Rubaszek

National Bank of Poland ( email )

00-919 Warsaw
Poland

Warsaw School of Economics (SGH) ( email )

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

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