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Are current accounts driven by competitiveness or asset prices? A synthetic model and an empirical test

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  • Alexander Guschanski
  • Engelbert Stockhammer

Abstract

This paper analyses the emergence of current account imbalances as a result of the co-existence of trade flows and financial flows. The literature has tended to view these factors in isolation: many post-Kaleckian models, as well as Net-saving approaches assume that financial flows will adjust to trade flows. Models focusing on financial crises feature a strong role for financial flows but ignore drivers of trade flows. Similarly, empirical analyses either ignore drivers of financial flows or insufficiently capture determinants of trade flows. The paper, first, proposes a simple macroeconomic framework of the current account which gives equal emphasis to trade flows, determined by price competitiveness, and financial flows, determined by asset prices. Second, we test a reduced form of the model for 28 OECD countries for the period 1971-2014. Our results indicate that cost competitiveness as well as asset prices play a role in the determination of current accounts, but asset prices have dominated in the last two decades.

Suggested Citation

  • Alexander Guschanski & Engelbert Stockhammer, 2017. "Are current accounts driven by competitiveness or asset prices? A synthetic model and an empirical test," Working Papers PKWP1716, Post Keynesian Economics Society (PKES).
  • Handle: RePEc:pke:wpaper:pkwp1716
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    Keywords

    current account; financial flows; competitiveness; asset prices;

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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