Current Account Benchmarks for Central and Eastern Europe: A Desperate Search?

49 Pages Posted: 4 Feb 2009

See all articles by Michele Ca' Zorzi

Michele Ca' Zorzi

European Central Bank (ECB)

Alexander Chudik

Federal Reserve Banks - Federal Reserve Bank of Dallas

Alistair Dieppe

World Bank

Date Written: January 28, 2009

Abstract

This paper examines two competing approaches for calculating current account benchmarks, i.e. the external sustainability approach a la Lane and Milesi-Ferretti (LM) versus the structural current accounts literature (SCA) based on panel econometric techniques. The aim is to gauge the medium term adjustment in current account positions that may be required in some central and eastern European countries. As regards the LM approach, we show how the outcome is especially sensitive to (i) the normative choice for external indebtedness and (ii) the decision to exclude the foreign direct investment subcomponent from the NFA aggregate. Turning our search to the SCA approach, we assess its sensitivity to model and parameter uncertainty by setting different selection criteria to choose amongst the over 8000 possible combinations of fundamentals. Furthermore, to test the robustness of our findings we combine all models, attaching to each a probability (Bayesian Averaging of Classical Estimates). We show both the LM and SCA methodologies are not immune from severe drawbacks and conceptual difficulties. Nevertheless pulling together the results of both approaches point to the countries that may need a current account adjustment over a medium term horizon.

Keywords: Current account, capital flows, financial integration, central and eastern Europe, panel data, model uncertainty, model combination

JEL Classification: C11, C33, F15, F32, F34, F41, O52

Suggested Citation

Ca' Zorzi, Michele and Chudik, Alexander and Dieppe, Alistair, Current Account Benchmarks for Central and Eastern Europe: A Desperate Search? (January 28, 2009). ECB Working Paper No. 995. Available at SSRN: https://ssrn.com/abstract=1316215

Michele Ca' Zorzi (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Alexander Chudik

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Alistair Dieppe

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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