Short-Term Determinants of Current Account Deficits: Evidence from Eastern Europe and the Former Soviet Union

This paper tests the short-term empirical link between current account deficits and a broad set of economic variables proposed by the theoretical and empirical literature for the emerging economies of Eastern Europe and the former Soviet Union. The empirical results of a modern (dynamic) panel data econometric analysis of countries in Central and Eastern Europe, Southern and Eastern Europe, and the Commonwealth of Independent States from 1992 to 2003 are chiefly consistent with theoretical and previous empirical analyses, indicating that there is a moderate level of persisting current account deficits beyond what can be explained by the behavior of its determinants. Economic growth has a negative effect on the current account balance, implying that the domestic growth rate is associated with a larger increase in domestic investment than savings. The stages of development hypothesis can be confirmed, as poorer countries in the region reveal higher current account deficits. A current account balance deterioration is likely to accompany shocks in public budget rates, confirming the validity of the twin deficit hypothesis in the region. The results also indicate the partial effect of demographic factors, as well as the strong influence of the growth rate of EU-15 countries on external imbalances. Finally, appreciation of the real exchange rate and a worsening of the terms of trade are generating deteriorations in the current account deficits of the transition region.