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Current Account Imbalances and Real Exchange Rates in the Euro Area

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. After controlling for the effects of income growth, we find the relationship between real exchange rates and the current account to be substantial in size and subject to non-linear effects. Overall, we argue 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.

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Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2006/23.

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Length: 29 pages
Date of creation: Sep 2006
Date of revision:
Handle: RePEc:cdf:wpaper:2006/23
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  1. 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.
  2. Leonard, Greg & Stockman, Alan C, 2002. "Current Accounts and Exchange Rates: A New Look at the Evidence," Review of International Economics, Wiley Blackwell, vol. 10(3), pages 483-96, August.
  3. Maurice Obstfeld and Kenneth Rogoff., 1995. "Exchange Rate Dynamics Redux," Center for International and Development Economics Research (CIDER) Working Papers C95-048, University of California at Berkeley.
  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. Matthieu Bussiere & Georgios Chortareas & Rebecca Driver, 2003. "Current Accounts, Net Foreign Assets and the Implications of Cyclical Factors," Eastern Economic Journal, Eastern Economic Association, vol. 29(2), pages 269-286, Spring.
  6. AfDB AfDB, . "AfDB Group Annual Report 2004," Annual Report, African Development Bank, number 60 edited by Koua Louis Kouakou.
  7. 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.
  8. Richard H. Clarida, 2007. "G7 Current Account Imbalances: Sustainability and Adjustment," NBER Books, National Bureau of Economic Research, Inc, number clar06-2, October.
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