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Countries’ safety and competitiveness, and the estimation of current account misalignments

Listed author(s):
  • Teresa Sastre

    ()

    (Banco de España)

  • Francesca Viani

    ()

    (Banco de España)

Current account imbalances and their sustainability are among the most debated international policy issues. Through the recently designed External Balance Assessment methodology (EBA), the IMF estimates the impact of several countries’ fundamentals and policies on their current account balance, calculates misalignments in their current account position and indicates policy recommendations which, if implemented, should contribute to reducing these imbalances. In this paper, we explore some extensions to the EBA, following two courses. First, we distinguish in current account regressions between countries that are considered safe investment destinations and non-safe economies. Since this distinction is likely to acquire special relevance in periods of global turmoil, we also distinguish between periods of global stress and tranquil times. Second, we embed in EBA regressions variables that drive countries’ external competitiveness. Results show that current account dynamics may be affected by competitiveness factors and differ significantly between safe and non-safe economies, with such differences becoming particularly relevant in turbulent times. These fi ndings suggest that EBA regressions may be overlooking the influence of countries’ safety and competitiveness on external balances. Our alternative misalignment estimations show larger imbalances than those calculated with the EBA for some Asian economies and smaller imbalances for some high-surplus EU countries.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/14/Fich/dt1401e.pdf
File Function: First version, January 2014
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Paper provided by Banco de España & Working Papers Homepage in its series Working Papers with number 1401.

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Length: 46 pages
Date of creation: Jan 2014
Handle: RePEc:bde:wpaper:1401
Contact details of provider: Web page: http://www.bde.es/

Web page: http://www.bde.es/bde/en/secciones/informes/Publicaciones_se/docs/
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  1. Chinn, Menzie D. & Prasad, Eswar S., 2003. "Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration," Journal of International Economics, Elsevier, vol. 59(1), pages 47-76, January.
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  7. Enrique Alberola & Aitor Erce & José María Serena, 2012. "International reserves and gross capital flows. Dynamics during financial stress," Working Papers 1211, Banco de España;Working Papers Homepage.
  8. Gruber, Joseph W. & Kamin, Steven B., 2007. "Explaining the global pattern of current account imbalances," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 500-522, June.
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  11. Kim, Chang-Jin, 2006. "Time-varying parameter models with endogenous regressors," Economics Letters, Elsevier, vol. 91(1), pages 21-26, April.
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  15. A team of the Working Group on Econometric Modelling of the European System of Central Banks, 2012. "Competitiveness and external imbalances within the euro area," Occasional Paper Series 139, European Central Bank.
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