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A panel VAR analysis of macro-financial imbalances in the EU

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  • Mariarosaria Comunale

    () (Bank of Lithuania)

Abstract

We investigate the interactions across current account misalignments, Real Effective Exchange Rate misalignments and financial (or output) gaps within EU countries. We apply panel techniques, including a Bayesian panel VAR, to 27 EU members over the period 1994-2012. We find that, for the euro area, the reaction of current account misalignments to a shock in the Real Effective Exchange Rate misalignments is the largest and the financial gap can influence the current account misalignments more than the output gap. In non-euro area countries and euro periphery an increase in current account misalignments leads to a temporary increase in the Real Effective Exchange Rate misalignments, lowering competitiveness and thus amplifying current account fluctuations. For the core, a raise in the rate or an expansion of the financial gap may help in rebalancing the current account. In the CEE members, an increase in the Real Effective Exchange Rate misalignments may bring larger current account deficits in the medium-long run.

Suggested Citation

  • Mariarosaria Comunale, 2017. "A panel VAR analysis of macro-financial imbalances in the EU," Bank of Lithuania Working Paper Series 40, Bank of Lithuania.
  • Handle: RePEc:lie:wpaper:40
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    References listed on IDEAS

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    Cited by:

    1. Mariarosaria Comunale, 2016. "A Closer Look at EU Current Accounts," CEIS Research Paper 393, Tor Vergata University, CEIS, revised 11 Aug 2016.
    2. Mariarosaria Comunale, 2017. "Synchronicity of real and financial cycles and structural characteristics in EU countries," CEIS Research Paper 414, Tor Vergata University, CEIS, revised 25 Sep 2017.
    3. Juan Carlos Cuestas & Karsten Staehr & Javier Ordóñez, 2018. "Unit Labour Costs and the Dynamics of Output and Unemployment in the Southern European Crisis Countries," TUT Economic Research Series 41, Department of Finance and Economics, Tallinn University of Technology.
    4. Rünstler, Gerhard & Balfoussia, Hiona & Burlon, Lorenzo & Buss, Ginters & Comunale, Mariarosaria & De Backer, Bruno & Dewachter, Hans & Guarda, Paolo & Haavio, Markus & Hindrayanto, Irma & Iskrev, Nik, 2018. "Real and financial cycles in EU countries - Stylised facts and modelling implications," Occasional Paper Series 205, European Central Bank.

    More about this item

    Keywords

    Current account; real effective exchange rate; financial gaps; panel VAR; foreign capital flows;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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