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A Closer Look at EU Current Accounts

32 Pages Posted: 13 Aug 2016  

Mariarosaria Comunale

Bank of Lithuania - Economics Department

Date Written: August 11, 2016

Abstract

In this paper, we look at the determinants of current accounts in twenty-seven EU countries over the period 1994-2014. The twenty-seven countries of interest are divided into three sub-groups, namely: core, periphery and CEE new member states. We also assess the current accounts based on computed equilibrium values, and we provide a measure of misalignment for the medium run. As determinants we include capital flows as well as demographic, fiscal and relative development factors. The initial Net Foreign Asset position and oil balance seem to matter more in the core countries than in the periphery and CEE new member states. In contrast, the periphery and CEE new member states seem to be more strongly affected by capital flows. Fiscal balance negatively affects only the periphery, while an increase in government spending is positive for the current account for CEE new member states. In the past twenty years these misalignments have shown a cyclical behaviour in most EU countries, and the magnitude of the cycles themselves are highly heterogeneous across groups. Lastly, we compute an adjusted current account equilibrium, which tries to correct the equilibrium value by the role of expectations (proxied by IMF projections). This factor has more of an impact in the UK than in the euro-area countries.

Keywords: Current account misalignments; foreign capital flows; European Union

JEL Classification: F32, F31, C33

Suggested Citation

Comunale, Mariarosaria, A Closer Look at EU Current Accounts (August 11, 2016). CEIS Working Paper No. 393. Available at SSRN: https://ssrn.com/abstract=2821638 or http://dx.doi.org/10.2139/ssrn.2821638

Mariarosaria Comunale (Contact Author)

Bank of Lithuania - Economics Department ( email )

Totoriu 4
Vilnius, LT-01121
Lithuania

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