Intra Euro Area Capital Flows and the Current Account Balance

45 Pages Posted: 23 Sep 2018

See all articles by Nektarios Michail

Nektarios Michail

Cyprus University of Technology

Andreas Savvides

Cyprus University of Technology

Date Written: August 3, 2018

Abstract

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

Michail, Nektarios and Savvides, Andreas, Intra Euro Area Capital Flows and the Current Account Balance (August 3, 2018). Available at SSRN: https://ssrn.com/abstract=3243260 or http://dx.doi.org/10.2139/ssrn.3243260

Nektarios Michail

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

Andreas Savvides (Contact Author)

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

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