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Current Account Imbalances and Real Exchange Rates in the Euro Area

  • Michael G. Arghyrou
  • Georgios Chortareas

Global current account imbalances have been one of the focal points of interest for policymakers during the last few years. Less attention has been paid, however, to the diverging current account balances of the individual euro area countries. In this paper we consider the dynamics of current account adjustment and the role of real exchange rates in current account determination in the EMU countries. After controlling for the effects of income growth, we find the relationship between real exchange rates and current accounts to be substantial in size and subject to nonlinear effects. We find that real exchange rates can offer further insights, beyond the effects of the income catch-up process, relevant to current account determination in the EMU. Copyright � 2008 The Authors. Journal compilation � 2008 Blackwell Publishing Ltd.

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Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 16 (2008)
Issue (Month): 4 (09)
Pages: 747-764

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Handle: RePEc:bla:reviec:v:16:y:2008:i:4:p:747-764
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  1. Greg Leonard & Alan C. Stockman, 2001. "Current Accounts and Exchange Rates: A New Look at the Evidence," NBER Working Papers 8361, National Bureau of Economic Research, Inc.
  2. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
  3. Matthieu Bussiere & Georgios Chortareas & Rebecca L Driver, 2003. "Current accounts, net foreign assets and the implications of cyclical factors," Bank of England working papers 173, Bank of England.
  4. Kim, Yoonbai & Chow, Hwee Kwan, 2003. "Optimum currency area in Europe: an alternative assessment," Economics Letters, Elsevier, vol. 81(3), pages 297-304, December.
  5. Maurice Obstfeld & Kenneth Rogoff, 1994. "Exchange Rate Dynamics Redux," NBER Working Papers 4693, National Bureau of Economic Research, Inc.
  6. Richard H. Clarida, 2006. "G7 Current Account Imbalances: Sustainability and Adjustment," NBER Working Papers 12194, National Bureau of Economic Research, Inc.
  7. AfDB AfDB, . "AfDB Group Annual Report 2004," Annual Report, African Development Bank, number 60 edited by Koua Louis Kouakou.
  8. Kul B. Luintel & Mosahid Khan, 2004. "Are International R&D Spillovers Costly for the United States?," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 896-910, November.
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