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Current Account Dynamics In The Euro Area

Author

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  • Yannick Timmer

    () (Department of Economics, Trinity College Dublin, Dublin, Ireland)

Abstract

This paper investigates the current account (CA) dynamics in the Euro Area by addressing three questions. First, are the vast CA deficits of some Euro Area members still sustainable? Second, what has financed them? Third, what is the reaction of an external shock? The aim of this paper is to address these issues by applying an econometric analysis to the most recent data. The main finding is that the CA does not have to be necessarily stationary. This result does not go in line with what most papers assume and conclude. Last, applying a vector error-correction model (VECM), I conclude that the dynamics of the CA deficits in the Euro Area and bank related net inflows seem to be highly associated. It is also found that CA adjustments do not occur contemporaneously to shocks. However, the adjustment of banking capital flows occurs almost immediately.

Suggested Citation

  • Yannick Timmer, 2014. "Current Account Dynamics In The Euro Area," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 6(2), pages 165-191, July.
  • Handle: RePEc:jes:wpaper:y:2014:v:6:i:2:p:165-191
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    File URL: http://www.ceswp.uaic.ro/articles/CESWP2014_VI2_TIM.pdf
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    References listed on IDEAS

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    3. John C Bluedorn & Rupa Duttagupta & Jaime Guajardo & Petia Topalova, 2013. "Capital Flows are Fickle; Anytime, Anywhere," IMF Working Papers 13/183, International Monetary Fund.
    4. Mark J. Holmes & Jesús Otero & Theodore Panagiotidis, 2010. "On the Stationarity of Current Account Deficits in the European Union," Review of International Economics, Wiley Blackwell, vol. 18(4), pages 730-740, September.
    5. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    6. Taylor, Alan M., 2002. "A century of current account dynamics," Journal of International Money and Finance, Elsevier, vol. 21(6), pages 725-748, November.
    7. Muge Adalet & Barry Eichengreen, 2007. "Current Account Reversals: Always a Problem?," NBER Chapters,in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 205-246 National Bureau of Economic Research, Inc.
    8. 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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    More about this item

    Keywords

    Current Account; Euro Area; Banking Capital Flows Romania;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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