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

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  • Ca' Zorzi, Michele
  • Rubaszek, Michał

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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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0895.

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Date of creation: May 2008
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Handle: RePEc:ecb:ecbwps:20080895

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

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Cited by:
  1. Helge Berger & Volker Nitsch, 2010. "The Euro’s Effecton Trade Imbalances," IMF Working Papers 10/226, International Monetary Fund.
  2. Jörg Decressin & Emil Stavrev, 2009. "Current Accounts in a Currency Union," IMF Working Papers 09/127, International Monetary Fund.
  3. Berger, Helge & Nitsch, Volker, 2014. "Wearing corset, losing shape: The euro's effect on trade imbalances," Journal of Policy Modeling, Elsevier, vol. 36(1), pages 136-155.
  4. Brissimis, Sophocles N. & Hondroyiannis, George & Papazoglou, Christos & Tsaveas, Nicholas T. & Vasardani, Melina A., 2010. "Current account determinants and external sustainability in periods of structural change," Working Paper Series 1243, European Central Bank.
  5. Chudik, Alexander & Dieppe, Alistair & Ca' Zorzi, Michele, 2012. "Thousands of models, one story: current account imbalances in the global economy," Working Paper Series 1441, European Central Bank.
  6. Bussière, Matthieu & Ca' Zorzi, Michele & Chudik, Alexander & Dieppe, Alistair, 2010. "Methodological advances in the assessment of equilibrium exchange rates," Working Paper Series 1151, European Central Bank.
  7. Lane, Philip R. & Pels, Barbara, 2012. "Current Account Imbalances in Europe," CEPR Discussion Papers 8958, C.E.P.R. Discussion Papers.

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