Intra Euro Area Capital Flows and the Current Account Balance
45 Pages Posted: 23 Sep 2018
Date Written: August 3, 2018
We examine the hypothesis that one of the fundamental factors behind the Euro Area (EA) crisis is the reversal of intra-EA capital flows between the ‘core’ and ‘periphery’ economies. We compile a data set on aggregate and disaggregate gross and net intra-EA flows between Germany and Greece, Ireland, Italy, Portugal and Spain (EA-5) during 1999Q1-2016Q1. We find evidence of a reversal of intra-EA gross capital inflows to the EA-5 after the crisis that can be explained by surges/stops in gross capital inflows and general economic and financial conditions in the EA-5. We estimate a panel VAR model of the joint determination between the current account balance of the EA-5 and foreign capital flows distinguishing between intra-EA capital flows and from the rest of the world. The impulse response functions reveal an important role for capital flows from Germany to the EA-5 in financing the current account balance of the EA-5.
Keywords: Foreign Capital Flows, Euro Area, Current Account
JEL Classification: F32, G15, O52
Suggested Citation: Suggested Citation