Current Account Determinants and External Sustainability in Periods of Structural Change

38 Pages Posted: 17 Sep 2010

See all articles by Sophocles N. Brissimis

Sophocles N. Brissimis

Bank of Greece

George Hondroyiannis

Bank of Greece

Christos Papazoglou

Bank of Greece - Economic Research Department

Nicholas T. Tsaveas

affiliation not provided to SSRN

Melina A. Vasardani

European Central Bank (ECB)

Date Written: September 8, 2010

Abstract

The aim of this paper is to study the main macroeconomic, financial and structural factors that shaped current account developments in Greece over the period from 1960 to 2007 and discuss these developments in relation to the issue of external sustainability. Concerns over Greece’s external sustainability have emerged since 1999 when the current account deficit widened substantially and exhibited high persistence. The empirical model used, which theoretically rests on the intertemporal approach, treats the current account as the gap between domestic saving and investment. We examine the behaviour of the current account in the long run and the short run using co-integration analysis and a variety of econometric tests to account for the effect of significant structural changes in the period under review. We find that a stable equilibrium current account model can be derived if the ratio of private sector financing to GDP, as a proxy for financial liberalisation, is included in the specification. Policy options to restore the country’s external sustainability are explored based on the estimated equilibrium model.

Keywords: Current account model, external sustainability

JEL Classification: F30, F32

Suggested Citation

Brissimis, Sophocles N. and Hondroyiannis, George and Papazoglou, Christos and Tsaveas, Nicholas T. and Vasardani, Melina A., Current Account Determinants and External Sustainability in Periods of Structural Change (September 8, 2010). ECB Working Paper No. 1243, Available at SSRN: https://ssrn.com/abstract=1673746

Sophocles N. Brissimis (Contact Author)

Bank of Greece ( email )

21 E. Venizelos Avenue
GR-10250 Athens
Greece

George Hondroyiannis

Bank of Greece ( email )

21 E. Venizelos Avenue
GR 102 50 Athens
Greece

Christos Papazoglou

Bank of Greece - Economic Research Department ( email )

21 E. Venizelos Avenue
GR 102 50 Athens
Greece
+30210-3202381 (Phone)
+30-210-3233025 (Fax)

HOME PAGE: http://www.bankofgreece.gr/publications/Abstract200529.htm

Nicholas T. Tsaveas

affiliation not provided to SSRN ( email )

Melina A. Vasardani

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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