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Real convergence, financial markets, and the current account - Emerging Europe versus emerging Asia

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  • Sabine Herrmann
  • Adalbert Winkler

Abstract

This paper examines the relevance of financial market characteristics for explaining the catching-up process in Europe and Asia. Global financial integration has been associated with divergent patterns of real convergence and the current account in emerging markets. While countries in emerging Asia have been running sizeable current account surpluses, countries in emerging Europe have been facing large current account deficits. In this paper we test for the relevance of financial market characteristics in explaining this divergence in the catching-up process in Europe and Asia. We assume that the two regions constitute distinct convergence clubs, with the euro area and the United States respectively at their core. In line with the theoretical literature, we find that better developed and more integrated financial markets increase emerging markets´ ability to borrow abroad. Moreover, the degree of financial integration within the convergence clubs - as opposed to the state of financial integration in the global economy - and the extent of reserve accumulation are significant factors in explaining the divergent patterns of real convergence and the current account in the regions under review.

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Paper provided by Directorate General Economic and Financial Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 362.

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Length: 51 pages
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:euf:ecopap:0362
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Keywords: real convergence; economic integration; saving and investment; current account developments; financial markets; emerging market economies; Real convergence; financial markets; and the current account - Emerging Europe versus emerging Asia; Economic Papers;

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Find related papers by JEL classification:
  • F15 - International Economics - - Trade - - - Economic Integration
  • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
  • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
  • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe
  • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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Cited by:

  1. Sabine Herrmann, 2009. "Do We Really Know That Flexible Exchange Rates Facilitate Current Account Adjustment? Some New Empirical Evidence for CEE Countries," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 55(4), pages 295-312.
  2. Ruben Atoyan & Jonathan F Manning & Jesmin Rahman, 2013. "Rebalancing; Evidence from Current Account Adjustment in Europe," IMF Working Papers 13/74, International Monetary Fund.
  3. Winkler, Adalbert, 2010. "The Financial Crisis: A Wake-Up Call for Strengthening Regional Monitoring of Financial Markets and Regional Coordination of Financial Sector Policies?," ADBI Working Papers 199, Asian Development Bank Institute.
  4. Stefania Fabrizio & Daniel Leigh & Ashoka Mody, 2009. "The second transition: Eastern Europe in perspective," European Economy - Economic Papers 366, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  5. Michał Brzozowski & Sadananda Prusty, 2013. "Impact of GDP volatility on current account balances," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 5(3), pages 239-252.
  6. Sabine Herrmann & Joern Kleinert, 2014. "Lucas Paradox and Allocation Puzzle - Is the euro area different?," Graz Economics Papers 2014-01, University of Graz, Department of Economics.
  7. Amaya Altuzarra & Jesús Ferreiro & Felipe Serrano, 2010. "The role of global imbalances as a cause of the current crisis," Journal of Innovation Economics, De Boeck Université, vol. 0(2), pages 25-48.
  8. Farkas, Beáta, 2011. "A közép-kelet-európai piacgazdaságok fejlődési lehetőségei az Európai Unióban
    [The development opportunities for the Central-East European market economies within the European Union]    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(5), pages 412-429.
  9. Beáta Farkas, 2012. "The Impact of the Global Economic Crisis in the Old and New Cohesion Member States of the European Union," Public Finance Quarterly, State Audit Office of Hungary, vol. 57(1), pages 53-70.
  10. von Hagen, Jürgen & Zhang, Haiping, 2014. "Financial development, international capital flows, and aggregate output," Journal of Development Economics, Elsevier, vol. 106(C), pages 66-77.
  11. Orszaghova, Lucia & Savelin, Li & Schudel, Willem, 2013. "External competitiveness of EU candidate countries," Occasional Paper Series 141, European Central Bank.
  12. Philip R. Lane, 2008. "The Macroeconomics of Financial Integration: A European Perspective," The Institute for International Integration Studies Discussion Paper Series iiisdp265, IIIS.
  13. Sabine Herrmann & Adalbert Winkler, 2008. "Real convergence, financial markets, and the current account – Emerging Europe versus emerging Asia," Occasional Paper Series 88, European Central Bank.
  14. Jarko Fidrmuc & Reiner Martin, 2011. "FDI, Trade and Growth in CESEE Countries," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 70-89,112-1.
  15. Herrmann, Sabine & Kleinert, Jörn, 2014. "Lucas paradox and allocation puzzle: Is the euro area different?," Discussion Papers 06/2014, Deutsche Bundesbank, Research Centre.
  16. Lien, Donald & Yang, Li & Zhou, Chunyang & Lee, Geul, 2014. "Co-movement between RMB and New Taiwan Dollars: Evidences from NDF markets," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 265-272.

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