Financial markets and the current account: emerging Europe versus emerging Asia

Abstract

Financial globalisation has been associated with divergent current account patterns in emerging market economies. While countries in emerging Asia have been running sizeable current account surpluses, countries in emerging Europe have been facing large current account deficits. In this paper we test for the relevance of financial market characteristics in explaining divergent current account patterns in emerging Europe and emerging Asia based on the assumption that both regions constitute two different convergence clubs with the euro area and the US representing the core, respectively. In line with the theoretical literature, we find that better developed and more integrated financial markets increase emerging markets´ ability to borrow abroad. The degree of financial integration within the convergence clubs as well as the extent of reserve accumulation are found to be the most significant factors to explain divergent current account patterns in emerging Europe and emerging Asia. We conclude that the overall character of integration matters for the pattern of current account developments in catching-up economies.JEL classification: F15, F21, O16, O52, O53

Industrial Structure, Demographic Pattern, and Indonesian Current Account

“…This result is in line with other empirical studies if in developing countries describes existence and development of the capital markets that can be accessed. Better and more integrated financial markets will increase the country's ability to borrow from abroad (Chinn & Prasad 2003;Herrmann & Winkler 2008).…”

Financial remoteness and the net external position

“…We do not report the individual demographic coefficients as introduced in Appendix A2 since they do not have a meaningful interpretation individually, but only jointly as parts of a cubic polynomial. 17 The main findings for the full sample (column 1) are a positive correlation with the net foreign asset position for the age cohorts ranging from 30 to 59, whereas high youth as well as old-age dependency are associated with a lower net external position. The relation for the less advanced sample (based on the findings in column 4) exhibits a peak for the age group between 25 to 29, whereas a negative impact on the net external position sets in for all age groups above the age of 40.…”

External imbalances in emerging and advanced European countries

“…Blanchard and Giavazzi conclude that the convergence mechanism leads to higher growth expectations in lower-income countries. The authors who followed up on work by Blanchard and Giavazzi (Hermann & Winkler, 2009;Lane, 2008aLane, , 2008bLane, , 2010 find that the common institutional framework in the European Economic Area allowed this pattern to emerge.…”

“…These economies lag behind in structural reforms, with a deficient capacity to adjust quickly to shocks. Hermann and Winkler (2009) consider current account imbalances in the context of income convergence and compare emerging Asia with emerging Europe. Based on panel analysis, they find that financial market characteristics are main determinants of current account dynamics.…”