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Current account determinants and external sustainability in periods of structural change

Author

Listed:
  • Sophocles N. Brissimis

    (Bank of Greece and University of Piraeus)

  • George Hondroyiannis

    (Bank of Greece and Harokopeio University)

  • Christos Papazoglou

    (Bank of Greece and Panteion University)

  • Nicholas T. Tsaveas

    (Bank of Greece)

  • Melina A. Vasardani

    (Bank of Greece and European Central Bank)

Abstract

The aim of this paper is to study the main macroeconomic, financial and structural characteristics that affected current account developments in Greece over the period 1960-2007 and link these to the issue of external sustainability. Concerns over Greece’s external sustainability have emerged since 1999 when the current account deficit widened substantially and exhibited high persistence. The empirical model used, which theoretically rests on the intertemporal approach, treats the current account as the gap between domestic saving and investment. We examine the behaviour of the current account in the long run and the short run using co-integration analysis and a variety of econometric tests to account for the effect of significant structural changes in the period under review. We find that a stable equilibrium current account model can be derived if the ratio of private sector financing to GDP, as a proxy for financial liberalization, is included in the specification. Policy options to restore the country’s external sustainability are explored by performing a simulation exercise based on the estimated equilibrium model.

Suggested Citation

  • Sophocles N. Brissimis & George Hondroyiannis & Christos Papazoglou & Nicholas T. Tsaveas & Melina A. Vasardani, 2010. "Current account determinants and external sustainability in periods of structural change," Working Papers 117, Bank of Greece.
    • Handle: RePEc:bog:wpaper:117
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    More about this item

    Keywords

    Current account model; external sustainability;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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