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On the empirical evidence of the intertemporal current account model for the euro area countries

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  • Ca' Zorzi, Michele
  • Rubaszek, Michał

Abstract

In this paper we present a novel approach to the empirical validation of the intertemporal approach to the current account. We develop a calibrated model highlighting the role of consumption smoothing and capital accumulation in the economic convergence process. After solving the model, we derive the theoretical values for the euro area countries’ current account, testing to what extent they match reality. The model explains most of the dispersion in the current account and saving ratio, though cannot equally well capture differences in the investment ratios. The conclusion that we draw is that consumption smoothing, based on expectations of economic convergence, is driving the current account of the euro area countries over medium-term horizons. Capital accumulation appears to play a less pronounced role. JEL Classification: D91, F36, F41

Suggested Citation

  • Ca' Zorzi, Michele & Rubaszek, Michał, 2008. "On the empirical evidence of the intertemporal current account model for the euro area countries," Working Paper Series 895, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2008895
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    References listed on IDEAS

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    Cited by:

    1. Van Ha, Pham & Kompas, Tom & Nguyen, Hoa Thi Minh & Long, Chu Hoang, 2017. "Building a better trade model to determine local effects: A regional and intertemporal GTAP model," Economic Modelling, Elsevier, vol. 67(C), pages 102-113.
    2. Sophocles Brissimis & George Hondroyiannis & Christos Papazoglou & Nicholas Tsaveas & Melina Vasardani, 2012. "Current account determinants and external sustainability in periods of structural change," Economic Change and Restructuring, Springer, vol. 45(1), pages 71-95, February.
    3. Ca’ Zorzi, Michele & Chudik, Alexander & Dieppe, Alistair, 2012. "Thousands of models, one story: Current account imbalances in the global economy," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1319-1338.
    4. Angelini, Elena & Ca' Zorzi, Michele & Forster, Katrin, 2014. "External and macroeconomic adjustment in the larger euro area countries," Working Paper Series 1647, European Central Bank.
    5. Lane, Philip R. & Pels, Barbara, 2012. "Current Account Imbalances in Europe," CEPR Discussion Papers 8958, C.E.P.R. Discussion Papers.
    6. Karl Farmer & Irina Ban, 2017. "Modeling Financial Integration, Intra-EMU and Asian-US External Imbalances," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 23(3), pages 261-281, August.
    7. Matthieu Bussiere & Aikaterini Karadimitropoulou & Miguel A. Leon-Ledesma, 2017. "Current account dynamics and the real exchange rate: Disentangling the evidence," University of East Anglia School of Economics Working Paper Series 2017-06, School of Economics, University of East Anglia, Norwich, UK..
    8. Jörg Decressin & Emil Stavrev, 2009. "Current Accounts in a Currency Union," IMF Working Papers 09/127, International Monetary Fund.
    9. Patrik RYFF, "undated". "Friedman Meets the Joneses: A Model of Essential Money with Consumption Externalities," EcoMod2010 259600146, EcoMod.
    10. Enno Schröder, 2015. "Eurozone Imbalances: Measuring the Contribution of Expenditure Switching and Expenditure Volumes 1990-2013," Working Papers 1508, New School for Social Research, Department of Economics, revised Sep 2015.
    11. Danica Unevska Andonova & Branimir Jovanovic, 2011. "Sustainability of the Macedonian Current Account," Working Papers 2011-06, National Bank of the Republic of Macedonia.
    12. repec:eee:asieco:v:51:y:2017:i:c:p:23-32 is not listed on IDEAS
    13. Helge Berger & Volker Nitsch, 2010. "The Euro’s Effecton Trade Imbalances," IMF Working Papers 10/226, International Monetary Fund.
    14. Kamel Jlassi, 2015. "Modelling and Forecasting of Tunisian Current Account: Aggregate versus Disaggregate Approach," IHEID Working Papers 13-2015, Economics Section, The Graduate Institute of International Studies.
    15. repec:kap:copoec:v:29:y:2018:i:1:d:10.1007_s10602-017-9255-9 is not listed on IDEAS
    16. Karl Farmer, 2016. "The Intertemporal Equilibrium Modeling of Intra-EMU and Global Trade Imbalances," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 22(4), pages 377-395, November.
    17. Antonis Adam & Sofia Tsarsitalidou, 2018. "Do democracies have higher current account deficits?," Constitutional Political Economy, Springer, vol. 29(1), pages 40-68, March.
    18. Michal Rubaszek, 2017. "Reforming housing rental market in a life-cycle model," Working Papers 2017-028, Warsaw School of Economics, Collegium of Economic Analysis.
    19. Torój, Andrzej, 2017. "Managing external macroeconomic imbalances in the EU: the welfare cost of scoreboard-based constraints," Economic Modelling, Elsevier, vol. 61(C), pages 293-311.
    20. Oscar Bajo-Rubio & Vicente Esteve, 2017. "Optimality of the current account of the Spanish economy, 1850-2015," Working Papers 1710, Department of Applied Economics II, Universidad de Valencia.
    21. Berger, Helge & Nitsch, Volker, 2014. "Wearing corset, losing shape: The euro's effect on trade imbalances," Journal of Policy Modeling, Elsevier, vol. 36(1), pages 136-155.
    22. Bussière, Matthieu & Ca' Zorzi, Michele & Chudik, Alexander & Dieppe, Alistair, 2010. "Methodological advances in the assessment of equilibrium exchange rates," Working Paper Series 1151, European Central Bank.

    More about this item

    Keywords

    current account; euro area.; General equilibrium models; intertemporal optimisation;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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