Current Account Deficits in the Euro Area. The End of the Feldstein Horioka Puzzle?

56 Pages Posted: 23 Jan 2003  

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics

Francesco Giavazzi

Bocconi University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: September 17, 2002

Abstract

Both Portugal and Greece have been running large current account deficits, and these are expected to continue in the future. Yet, financial markets do not appear to be worried. Starting from this observation, we document that Portugal and Greece are in fact representative of a broader evolution: Increasing goods and financial market integration is leading to an increasing decoupling of saving and investment within the European Union, and even more so within the Euro area. In particular, it is allowing poorer countries to invest more, save less, and run larger current account deficits. The converse holds for the richer countries.

Keywords: Current Account, Europe, Euro, Feldstein Horioka Puzzle, Saving, Investment, Capital Market Integration, Product Market Integration

JEL Classification: F32, F36, F41, F43

Suggested Citation

Blanchard, Olivier J. and Giavazzi, Francesco, Current Account Deficits in the Euro Area. The End of the Feldstein Horioka Puzzle? (September 17, 2002). MIT Department of Economics Working Paper No. 03-05. Available at SSRN: https://ssrn.com/abstract=372880 or http://dx.doi.org/10.2139/ssrn.372880

Olivier J. Blanchard (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Francesco Giavazzi

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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