What Drives EMU Current Accounts? A Time Varying Structural VAR Approach

39 Pages Posted: 11 May 2016

Date Written: May 10, 2016

Abstract

Current account imbalances have been a decisive feature of the European banking and sovereign debt crisis. This paper investigates the drivers of euro area current accounts, their divergence and subsequent rebalancing, within a structural model accommodating potential regime changes at the introduction of the common currency and the onset of the financial crisis. In the run-up to the crisis domestic demand shocks account for a substantial fraction in the current account deficits of EMU periphery countries --- the mirror image of Germany's foreign demand driven surplus. While supply side factors also explain part of the current account deficits in Italy, Spain and Portugal in the years before the crisis, shocks to price competitiveness or foreign demand played a minor role for those economies. The adjustment subsequent to the financial crisis was borne partly by a contraction in demand in the economies running deficits, but is also due to adverse supply shocks implying lower growth perspectives.

Keywords: Current account, imbalances, EMU, rebalancing, sign restrictions, time varying VAR

JEL Classification: E00, F32, F4

Suggested Citation

Podstawski, Maximilian, What Drives EMU Current Accounts? A Time Varying Structural VAR Approach (May 10, 2016). Available at SSRN: https://ssrn.com/abstract=2778147 or http://dx.doi.org/10.2139/ssrn.2778147

Maximilian Podstawski (Contact Author)

DIW Berlin ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

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