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Current accounts in the euro area: An intertemporal approach

  • José M. Campa

    ()

    (IESE Business School)

  • Ángel Gavilán

    ()

    (Banco de España)

This paper uses an intertemporal model of the current account to evaluate the fluctuations in current account balances experienced by Euro area countries over the last three decades. In the model current account balances are used to smooth consumption and they are driven by expectations about future income and relative prices. This simple model is not rejected for six (Belgium, France, Italy, Netherlands, Portugal, and Spain) of the ten Euro area countries examined, although the model tends to underestimate their current account volatility. The analysis also shows that the relative contributions to current account balances of future output and relative prices differ across countries. Expectations of future growth increased in all Southern European countries at the creation of the Euro but they had considerably diverged by 2005. While in Portugal these expectations are now below its historical mean, in Spain they are at a historical high.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/06/Fic/dt0638e.pdf
File Function: First version, January 2007
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Paper provided by Banco de España & Working Papers Homepage in its series Working Papers with number 0638.

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Length: 47 pages
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:bde:wpaper:0638
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