Determinants of bilateral current account balance between the Eurozone and the United States
Article Sidebar
Main Article Content
Abstract
Long- and short-run current account balance (CAB) determinants of the nineteen Eurozone (EZ) member states vis-a-vis the United States (US) are examined. Particularly, the competitiveness of the EZ vs the US, the relationship between the current account deficit and the budget deficit (twin deficit), and other factors determining the current account balance are studied. Quarterly data was used in a sample of the nineteen EZ member states with the US as a trading partner over the period 2008 - 2018. It is found that the CAB in the long run has a positive relationship with the real interest rate, real exchange rate, Gross Domestic Product (GDP) per capita, and exchange rate volatility, but a negative relationship with the fiscal balance. In the short run, it is notable that only the real exchange rate affects the current account balance. Finally, policy implications are discussed regarding the determinants of the current account.
Keywords:
Downloads
Article Details
References
Agiomirgianakis, G., Serenis, D., & Tsounis, N. (2017). Effective timing of tourism policy: The case of Singapore. Economic Modelling, 60(1), 29-38. https://doi.org/10.1016/j.econmod.2016.09.001
Anoruo E., & Elike. U. (2008). Asymmetric dynamics in current account - interest rate nexus: evidence from Asian countries. Investment Management and Financial Innovations, 5(4).
Aloryito, G. K., Senadza, B., & Nketiah-Amponsah, E. (2016). Testing the Twin Deficits Hypothesis: Effect of Fiscal Balance on Current Account Balance-a Panel Analysis of Sub-Saharan Africa. Modern Economy 7(09), 945. https://doi.org/10.4236/me.2016.79097
Arize, A.C. (1994). Cointegration Test of a Long-Run Relation between the Real Effective Exchange Rate and the Trade Balance. International Economic Journal, 8(3), 1-9. https://doi.org/10.1080/10168739400000001
Baharumshah, A. Z. (2001). The Effect of Exchange Rate on Bilateral Trade Balance: New Evidence from Malaysia and Thailand. Asian Economic Journal, 15(3), 291-312. https://doi.org/10.1111/1467-8381.00135
Bernhardsen, T. (2000). The Relationship between Interest Rate Differentials and Macroeconomic Variables: A Panel Data Study for European Countries. Journal of International Money and Finance, 19(2), 289-308. https://doi.org/10.1016/S0261-5606(00)00002-4
Blanchard, O., & Giavazzi F. (2002). Current Account Deficits in the Euro Area: The End of the Feldstein-Horioka Puzzle? Brookings papers on economic activity 2002(2), 147-209. https://doi.org/10.1353/eca.2003.0001
Bussière, M., Fratzscher, M., & Müller, G.J. (2004). Current account dynamics in OECD and EU acceding countries - an intertemporal approach. ECB Working Paper No. 311. https://doi.org/10.2139/ssrn.515074
Calderón, C., Chong, A., & Loayza, N. (1999). Determinants of Current Account Deficits in Developing Countries. Working Papers Central Bank of Chile 51, Central Bank of Chile.
Calderón, C., Chong, A., & Zanforlin, L. (2007). Current Account Deficits in Africa: Stylized Facts and Basic Determinants. Economic Development and Cultural Change, 56(1), 191-221. https://doi.org/10.1086/520557
Catão, L., & Falcetti, E. (2002). Determinants of Argentina's External Trade. Journal of Applied Economics 5(1), 19-57. https://doi.org/10.1080/15140326.2002.12040570
Ca' Zorzi, M., Dieppe, A., & Chudik, A. (2009). Current account benchmarks for central and eastern Europe: a desperate search? ECB Working Paper No. 995. https://doi.org/10.2139/ssrn.1316215
Chinn, M. D., & Prasad E.S. (2003). Medium-Term Determinants of Current Accounts in Industrial and Developing Countries: An Empirical Exploration. Journal of international economics, 59(1), 47-76. https://doi.org/10.1016/S0022-1996(02)00089-2
Das, D.K. (2016). Determinants of Current Account Imbalance in the Global Economy: A Dynamic Panel Analysis. Journal of Economic Structures, 5(1), 8. https://doi.org/10.1186/s40008-016-0039-6
Debelle, G., & Faruqee H. (1996). What Determines the Current Account? A Cross-Sectional and Panel Approach. IMF Working Paper No. 58. https://doi.org/10.5089/9781451966701.001
De Grauwe, P. (1988). Exchange Rate Variability and the Slowdown in Growth of International Trade. IMF Econ Rev, 35, 63-84. https://doi.org/10.2307/3867277
Dettmann, G., Möbert J., & Weistroffer C. (2012). Bilateral Current Account Rebalancing in the EMU. Intereconomics, 47(4), 257-64. https://doi.org/10.1007/s10272-012-0426-7
European Central Bank (ECB) (2020). ECB reference exchange rate, US dollar/Euro, 2:15 pm (C.E.T.). https://doi.org/10.14612/OLDANI_2_2012
Eurostat (2020). Harmonised index of consumer prices - monthly data, Luxemburg: Eurostat Publications.
Eurostat (2020). Quarterly non-financial accounts for general government, Luxemburg: Eurostat Publications.
Eurostat (2020). Personal transfers and compensation of employees, Luxemburg: Eurostat publications.
Eurostat (2021). Countries and Regions: United States, European Commission: DG Trade, https://ec.europa.eu/trade/policy/countries-and-regions/countries/united-states/ (accessed 3rd January, 2022)
Ghosh, A., & Ostry. J. D. (1995). The Current Account in Developing Countries: A Perspective from the Consumption-Smoothing Approach. The World Bank Economic Review, 9(2), 305-33. https://doi.org/10.1093/wber/9.2.305
Glick, R., & Rogoff K. (1995). Global versus Country-Specific Productivity Shocks and the Current Account. Journal of Monetary Economics, 35(1), 159-92. https://doi.org/10.1016/0304-3932(94)01181-9
Greenwood, J. (1983). Expectations, the Exchange Rate, and the Current Account. Journal of Monetary Economics, 12(4), 543-69. https://doi.org/10.1016/0304-3932(83)90038-7
Gruber, J. W., & Kamin S.B. (2007). Explaining the Global Pattern of Current Account Imbalances. Journal of International Money and Finance, 26(4), 500-522. https://doi.org/10.1016/j.jimonfin.2007.03.003
Herrman, S. & Winker, A. (2008). Real convergence, financial markets, and the current account: Emerging Europe versus Emerging Asia, ECB Working Paper No. 88. https://doi.org/10.2139/ssrn.1084928
Herrmann, S., & Jochem, A. (2005). Determinants of current account developments in the central and east European EU member states - consequences for the enlargement of the euro area. Discussion Paper Series 1: Economic Studies, 32, Deutsche Bundesbank. https://doi.org/10.2139/ssrn.2785215
Huchet-Bourdon, & M., Korinek. J. (2011). To What Extent Do Exchange Rates and their Volatility Affect Trade? OECD Trade Policy Papers, No. 119. OECD Publishing, Paris.
Im, K.S., Pesaran, M.H., & Shin. Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115(1), 53-74. https://doi.org/10.1016/S0304-4076(03)00092-7
Iqbal, B. A., Rahman, M. N., & Turay, A. (2017). Indo-US Bilateral FDI and Current Account Balance: Developing Causal Relationship. Academic Journal of Interdisciplinary Studies, 6(1), 129. https://doi.org/10.5901/ajis.2017.v6n1p129
Iyke B.N., & Ho S-Y. (2017). The Real Exchange Rate, the Ghanaian Trade Balance, and the J-curve. Journal of African Business, 18(3): 380-392. https://doi.org/10.1080/15228916.2017.1315706
Kalou, S., & Paleologou S.M. (2012). The Twin Deficits Hypothesis: Revisiting an EMU Country. Journal of Policy Modeling, 34(2): 230-41. https://doi.org/10.1016/j.jpolmod.2011.06.002
Kandil, M. (2009). Exchange Rate Fluctuations and the Balance of Payments: Channels of Interaction in Developing and Developed Countries. Journal of Economic Integration, 24(1): 151-174. https://doi.org/10.11130/jei.2009.24.1.151
Kraay, A., & Ventura, J., (2000). Current Accounts in Debtor and Creditor Countries. The Quarterly Journal of Economics, 115(4), 1137-66. https://doi.org/10.1162/003355300555033
Falk, M. (2008). Determinants of the Trade Balance in Industrialized Countries, Countries. WIFOStudies, WIFO, number 34230, June.
Lane, P. R., & Milesi-Ferretti. G.M. (2002). External Wealth, the Trade Balance, and the Real Exchange Rate. European Economic Review, 46(6), 1049-71. https://doi.org/10.1016/S0014-2921(02)00160-5
Lars E. O. S., & Razin, A. (1983). The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect. Journal of Political Economy, 91(1), 97-125. https://doi.org/10.1086/261130
Leiderman, L., & Razin, A. (1991). Determinants of External Imbalances: The Role of Taxes, Government Spending, and Productivity. Journal of the Japanese and International Economies, 5(4), 421-50. https://doi.org/10.3386/w3738
Levin, A., Lin, C-F., & Chu C-S.J. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of Econometrics, 108(1): 1-24. https://doi.org/10.1016/S0304-4076(01)00098-7
Medina L., Prat J., & Thomas A. H. (2010). Current Account Balance Estimates for Emerging Market Economies. IMF Working Papers No. 43: 1-22. https://doi.org/10.5089/9781451962994.001
Mendoza, E. (1991). Real Business Cycles in a Small Open Economy." American Economic Review 81(4): 797-818.
Mendoza, E. (1995). The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations. International Economic Review, 36(1): 101-37. https://doi.org/10.2307/2527429
Milesi-Ferrett, G. M., & Razin, A. (1996). Sustainability of Persistent Current Account Deficits, No. 5467, NBER Working Papers, National Bureau of Economic Research, Inc. https://doi.org/10.3386/w5467
Nieminen, M. (2015). Trade imbalances within the euro area and with respect to the rest of the world. Economic Modelling, 48: 306-314. https://doi.org/10.1016/j.econmod.2014.10.012
Nuroglu, E., & FomoniKunst, R.M. (2012). The Effects of Exchange Rate Volatility on International Trade Flows: Evidence from Panel Data Analysis and Fuzzy Approach. Zbornik radova Ekonomskog fakulteta u Rijeci: časopis za ekonomsku teoriju i praksu, 30(1): 9-31.
Obstfeld, M., & Rogoff K. (1995). The Intertemporal Approach to the Current Account. In Grossman, G.M., Rogoff, K. (Eds.) Handbook of International Economics, vol. 3, North-Holland, 1731-1799. https://doi.org/10.1016/S1573-4404(05)80014-0
Organisation for Economic Co-operation and Development (OECD) (2020). Trade in services by partner economy, Paris: OECD Publications.
Organisation for Economic Co-operation and Development (OECD) (2020). Inflation (CPI) (indicator). Paris: OECD Publications. https://doi.org/10.1787/eee82e6e-en
Organisation for Economic Co-operation and Development (OECD) (2020). Short-term interest rates (indicator). Paris: OECD Publications. https://doi.org/10.1787/2cc37d77-en
Organisation for Economic Co-operation and Development (OECD) (2020). Gross domestic product - expenditure approach, Paris: OECD Publications.
Organisation for Economic Co-operation and Development (OECD) (2020). Balance of Payments - Balance on goods, Paris: OECD Publications.
Omoniyi, O. S., Olasunkanmi, O.I., & Babatunde O.A. (2012). Empirical Analysis of Twins' Deficits in Nigeria." IJMBS. 2(3): 38-41.
Osoro, K. O., Gor, S.O., & Mbithi M.L. (2014). The Twin Deficit and the Macroeconomic Variables in Kenya. International Journal for Innovation Education and Research, 2(9), 64-84. https://doi.org/10.31686/ijier.vol2.iss9.239
Pesaran, M. H., Shin, Y., & Smith. R.P. (1999). Pooled Mean Group Estimation of Dynamic Heterogeneous Panels. Journal of the American Statistical Association, 94(446), 621-634. https://doi.org/10.1080/01621459.1999.10474156
Purwono, R., Mucha, K., & Mubin, M. K. (2018). The Dynamics of Indonesia's Current Account Deficit: Analysis of the Impact of Exchange Rate Volatility. The Journal of Asian Finance, Economics and Business, 5(2), 25-33. https://doi.org/10.13106/jafeb.2018.vol5.no2.25
Ratha, A. (2012). Twin Deficits or Distant Cousins? Evidence from India. South Asia Economic Journal, 13(1), 51-68. https://doi.org/10.1177/139156141101300103
Rubaszek M., Kolasa M., & Taglioni, D. (2010). Firms in the great global recession: The role of foreign ownership and financial dependence. Emerging Markets Review, 11(4), 341-357. https://doi.org/10.1016/j.ememar.2010.06.001
Serenis, D., & Tsounis, N., 2012. A New Approach for Measuring Volatility of the Exchange Rate." Procedia Economics and Finance, 1, 374-82. https://doi.org/10.1016/S2212-5671(12)00043-3
Serenis, D., & Tsounis, N. (2015). The Effects of Exchange Rate Volatility on Sectoral Exports. Evidence from Sweden, the U.K. and Germany. International Journal of Computational Economics and Econometrics, 5(1): 71-107. https://doi.org/10.1504/IJCEE.2015.066204
Stockman, A. (1987). The Equilibrium Approach to Exchange Rates". Federal Reserve Bank of Richmond Economic Review, March-April, 12-31.
Stöllinger, R. (2020). Tradability of Output and the Current Account in Europe. International Economics and Economic Policy, 17(1), 167-218. https://doi.org/10.1007/s10368-019-00449-y
Tornell, A., & Lane, P.R., 1998. Are Windfalls a Curse? A Non-Representative Agent Model of the Current Account. Journal of International Economics, 44(1): 83-112. https://doi.org/10.1016/S0022-1996(97)00016-0
Vieira, F. V., & MacDonald. R. (2020). The Role of Exchange Rate for Current Account: A Panel Data Analysis. EconomiA 21(1): 57-72. https://doi.org/10.1016/j.econ.2020.05.002
Waliullah, M., Kakar, R., & Khan, W. (2010). The Determinants of Pakistan's Trade Balance: An ARDL Cointegration Approach. The Lahore Journal of Economics, 15 (1): 1-26. https://doi.org/10.35536/lje.2010.v15.i1.a1
Yoshida Y., & Zhai W. (2021). Revisiting the Glick-Rogoff Current Account Model: An Application to the Current Accounts of BRICS Countries. In: Dufrénot G., Matsuki T. (eds) Recent Econometric Techniques for Macroeconomic and Financial Data. Dynamic Modeling and Econometrics in Economics and Finance, vol 27. https://doi.org/10.1007/978-3-030-54252-8_10