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Current Accounts in the Eurozone Countries: The Role of Euro, Fiscal Policies and Financial Developments

Author

Listed:
  • Jaromír Baxa

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic. Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Pod Vodárenskou veží 4, 182 08 Prague 8, Czech Republic)

  • Tomáš Olesnanik

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic)

Abstract

Should we blame the euro for widening of current account deficits in the EMU? In this paper, we employ time-specific fixed effect estimator to study determinants of the current account deficits of the EU countries before and after adoption of the euro. Our aim is to assess to what extent the increased current account deficits could be attributed to the single currency and to the role of other variables, especially fiscal policy and developments of financial sector. We show that euro had negative effect on current account balances of southern countries. Moreover, we provide evidence that the role of fiscal policy in current account dynamics changed with euro adoption and twin deficits emerged in many countries. Finally, we document significant role of growing credits to private sector for built-up of persistent current account deficits, hence the negative effects of excessive lending on external balance should be addressed by the regulators and policy makers in the future.

Suggested Citation

  • Jaromír Baxa & Tomáš Olesnanik, 2014. "Current Accounts in the Eurozone Countries: The Role of Euro, Fiscal Policies and Financial Developments," Working Papers IES 2014/27, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Sep 2014.
    • Handle: RePEc:fau:wpaper:wp2014_27
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    File URL: http://ies.fsv.cuni.cz/sci/publication/show/id/5196/lang/cs
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    More about this item

    Keywords

    current account; euro; fiscal balance; financial system;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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