Current Account Imbalances in the European Monetary Union

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: This paper investigates empirical determinants of current account positions worldwide with a focus on the countries that started out as the European Monetary Union (including Greece that joined in 2001). Specifically, it addresses the question whether current accounts inside the Eurozone have reacted more sensitively to changes in macroeconomic fundamentals due to the facilitation of inter-country financial flows and the abolishment of foreign currency risk. Comparing estimation results for different country samples over the period from 1998 to 2009, I find some indication that capital outflows/inflows might have reacted more sensitively to different development levels, growth rates, and competitiveness levels inside the European Monetary Union. Measuring these differences as interaction effects, I do not find that current account positions are significantly more sensitive in the Euro area compared to other advanced economies however. Therefore, evidence that the common currency facilitated current account divergence in the period under consideration is found to be weak.

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