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Current accounts in the euro area: An intertemporal approach

  • Campa, Jose Manuel
  • Gavilan, Angel
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    Current accounts have diverged substantially among euro area countries since the creation of the euro. This divergence has raised concerns about the sustainability of some member countries' external indebtedness. This paper uses an intertemporal model of the current account to analyze the fluctuations in current account balances experienced by euro area countries over the last three decades and to disentangle its determinants. We find that the model is not rejected for six of the ten euro area countries examined (Belgium, France, Italy, Netherlands, Portugal and Spain), although it tends to underestimate their current account volatility. For these countries, we derive the expectations about future income and relative prices, which, according to the model, underlie their current account balances. Expectations about future growth increased in all Southern European countries at the creation of the euro, but they diverged considerably by 2005. While in Portugal these expectations were below its historical mean by then, in Spain they were at an historical high.

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    Article provided by Elsevier in its journal Journal of International Money and Finance.

    Volume (Year): 30 (2011)
    Issue (Month): 1 (February)
    Pages: 205-228

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    Handle: RePEc:eee:jimfin:v:30:y:2011:i:1:p:205-228
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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