Current Account Deficits in the Euro Area. The End of the Feldstein Horioka Puzzle?
Olivier J. Blanchard
National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics
Bocconi University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
September 17, 2002
MIT Department of Economics Working Paper No. 03-05
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.
Number of Pages in PDF File: 56
Keywords: Current Account, Europe, Euro, Feldstein Horioka Puzzle, Saving, Investment, Capital Market Integration, Product Market Integration
JEL Classification: F32, F36, F41, F43
Date posted: January 23, 2003