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External deficits in the Baltics 1995 to 2007: Catching up or imbalances

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  • Julia Lendvai
  • Werner Roeger
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    Abstract

    This paper studies external deficits in the Baltics between 1995 and 2007.It uses a calibrated small-open-economy dynamic general equilibrium model incorporating a financial accelerator to assess to what extent deficits can be explained by productivity growth, fall in spreads and increasing access to credit.Results suggest that the external deficit and other key macroeconomic aggregates can be well fitted by the equilibrium response of the model economy. Real convergence is found to have been dominant in the first half of the sample. More reversible financial factors became increasingly important towards the end of the period pointing to growing vulnerability. Positive growth outlook is also likely to have played a significant role in the build up of the foreign debt. Reversal scenarios confirm the need for a sizable readjustment.

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    Bibliographic Info

    Paper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 398.

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    Length: 40 pages
    Date of creation: Jan 2010
    Date of revision:
    Handle: RePEc:euf:ecopap:0398

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    Keywords: Baltic States financial accelerator dynamic general equilibrium Roeger Lendvai External Deficits in the Baltics 1995 to 2007 Catching Up or Imbalances;

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