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On the empirical evidence of the intertemporal current account model for the euro area countries

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Author Info
Michele Ca’ Zorzi () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Michal Rubaszek () (National Bank of Poland, ul. Swietokrzyska 11/21, 00-919 Warsaw, Poland and Warsaw School of Economics, al. Niepodleglosci 162, 02-554 Warsaw, Poland.)

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Abstract

In this paper we present a novel approach to the empirical validation of the intertemporal approach to the current account. We develop a calibrated model highlighting the role of consumption smoothing and capital accumulation in the economic convergence process. After solving the model, we derive the theoretical values for the euro area countries’ current account, testing to what extent they match reality. The model explains most of the dispersion in the current account and saving ratio, though cannot equally well capture differences in the investment ratios. The conclusion that we draw is that consumption smoothing, based on expectations of economic convergence, is driving the current account of the euro area countries over medium-term horizons. Capital accumulation appears to play a less pronounced role. JEL Classification: D91, F36, F41.

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Paper provided by European Central Bank in its series Working Paper Series with number 895.

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Length: 27 pages
Date of creation: May 2008
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Handle: RePEc:ecb:ecbwps:20080895

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Related research
Keywords: General equilibrium models; intertemporal optimisation; current account; euro area.;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
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  5. Olivier Blanchard & Francesco Giavazzi, 2002. "Current Account Deficits in the Euro Area: The End of the Feldstein Horioka Puzzle?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2002-2), pages 147-210. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Emil Stavrev & Jörg Decressin, 2009. "Current Accounts in a Currency Union," IMF Working Papers 09/127, International Monetary Fund. [Downloadable!]
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