External imbalances in emerging and advanced European countries

Abstract

This paper aims to explain some developments in current accounts across advanced and emerging European countries with a fixed exchange rate. Our main goal is to identify key factors affecting the external imbalances. This assessment of the cause of external imbalances will help us understand what has to be changed in European economies to recover the external balances going forward. We estimated a panel VAR model over the period 1999 to 2014 for a sample of 11 European countries that were split into two groups: advanced and emerging. The obtained results show that the real effective exchange rate has a negative effect on the current account balance in both groups of countries, although the effect is more pronounced in emerging than in advanced countries. Other variables such as the budget balance, economic growth, and output gap affect current account balance positively in advanced countries and negatively in emerging countries. Economic activity captured by output gap explains the highest portion of current account variations in emerging countries. In advanced countries, in addition to economic activity, the real exchange rate also plays a prominent role in current account imbalances.

The Impact of Interest Rate Spillover on Output Gap: A Dynamic Spatial Durbin Model

“…These results support Hypothesis 2 and correspond with the study by Iacoviello and Navarro (2019). The decline in the output gap further affects current account imbalances (Cota et al 2017). Economic conditions affected by a multidimensional crisis also affect fluctuations in foreign exchange rates (Liu et al 2019;Georgiadis 2016;Ntshangase et al 2023).…”

“…The literature has shown a tendency for monetary policies determined by the world's leading countries to have a spillover effect on countries in the regions that are closely related (Ezcurra and Rios 2015;Georgiadis 2016;Iacoviello and Navarro 2019;Miranda-Agrippino and Rey 2020). However, the spillover effect of interest rates on a country's output gap is yet to be widely studied (Cota et al 2017;Tian et al 2023). Research on spillover effects mainly focuses on foreign exchange rates, FDI, and financial markets (Albagli et al 2019;Blasques et al 2016;Dimitriou et al 2017;Eck and Huber 2016;Fasanya et al 2021;Huang and Zhang 2020;Tian et al 2023).…”

Balance of Trade, Exchange Rate and Economic Growth in Nigeria

“…e model for this study is speci ed based on economic theory and previous research, such as that conducted by Cota, Erjavec, & Bogdan (2017). We have selected current account balance (balance of trade), exchange rate (EXCHR), exports (EXPT), and imports (IMPT) as macroeconomic determinants relevant to explaining GDP growth rate.…”

Macroeconomic Factors and Current Account Deficit in Indonesia

“…Several studies also investigate macroeconomic factors, while others examine institutional and financial factors. Previous studies that linked macroeconomic variables to current account imbalances were conducted by (Bollano, 2015;Comunale, 2015;Cota et al, 2017;Das, 2016;Eita, 2019;Eita et al, 2018;Elhendawy, 2014;Gehringer, 2012;Gruber & Kamin, 2007;Gudmundsson & Zoega, 2014;Kim & Lee, 2008;Lin & Kueh, 2019;Neaime, 2015;Nyongesa & Mohamed, 2013;Oshota & Badejo, 2015;Yang, 2011). Meanwhile, according to (Altayligil & Çetrez, 2020;Chinn & Ito, 2007;Marzinotto, 2020;Putri, 2021;Schmitz & Hagen, 2011), current account determinants can be concluded by incorporating macroeconomic, institutional, and financial factors.…”