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Determinants of current account in the EU: the relation between internal and external balances in the new members

  • Ketenci, Natalya
  • Uz, Idil

This paper considers the major determinants of the current account in the new members of the EU. It examines the long-run and short-run impact of real exchange rate, investment, private and public savings on current account. The bounds testing autoregressive distributed lag (ARDL) approach to cointegration is used and the results indicate that twin deficit exists; in another words, government budget deficit shocks have led to deficit in current accounts in Czech Republic, Latvia, Lithuania, Slovenia and Slovakia for the considered period. At the same time, empirical evidence was found that private savings, investment and real exchange rate are key variables as well, causing changes in the current account in the long-run as well as in the short-run. Finally, stability tests were applied to the model indicating no evidence of any structural instability in the model of these countries.

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File URL: http://mpra.ub.uni-muenchen.de/27466/1/MPRA_paper_27466.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27466.

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Date of creation: 2010
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Handle: RePEc:pra:mprapa:27466
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  2. Salvatore, Dominick, 2006. "Twin deficits in the G-7 countries and global structural imbalances," Journal of Policy Modeling, Elsevier, vol. 28(6), pages 701-712, September.
  3. Jeroen J.M. Kremers & Neil R. Ericsson & Juan J. Dolado, 1992. "The power of cointegration tests," International Finance Discussion Papers 431, Board of Governors of the Federal Reserve System (U.S.).
  4. Michel Normandin, 1994. "Budget Deficit Persistence and the Twin Deficits Hypothesis," Cahiers de recherche CREFE / CREFE Working Papers 31, CREFE, Université du Québec à Montréal.
  5. Evans, Paul, 1986. "Is the dollar high because of large budget deficits?," Journal of Monetary Economics, Elsevier, vol. 18(3), pages 227-249, November.
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  8. Saikkonen, Pentti, 1991. "Asymptotically Efficient Estimation of Cointegration Regressions," Econometric Theory, Cambridge University Press, vol. 7(01), pages 1-21, March.
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  11. Enders, Walter & Lee, Bong-Soo, 1990. "Current Account and Budget Deficits: Twins or Distant Cousins?," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 373-81, August.
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  16. David Hendry, 1995. "On the interactions of unit roots and exogeneity," Economics Papers 7., Economics Group, Nuffield College, University of Oxford.
  17. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  18. Maurice Obstfeld & Kenneth S. Rogoff, 2005. "Global Current Account Imbalances and Exchange Rate Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(1), pages 67-146.
  19. Kim, Soyoung & Roubini, Nouriel, 2008. "Twin deficit or twin divergence? Fiscal policy, current account, and real exchange rate in the U.S," Journal of International Economics, Elsevier, vol. 74(2), pages 362-383, March.
  20. Jeffrey A. Rosensweig & Ellis W. Tallman, 1991. "Fiscal policy and trade adjustment: are the deficits really twins?," Working Paper 91-2, Federal Reserve Bank of Atlanta.
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