What Germany should fear most is its own fear: An analysis of Target2 and current account imbalances. CEPS Working Document No. 368, September 2012

This paper analyzes two claims that have been made about the Target2 payment system. The first one is that this system has been used to support unsustainable current account deficits of Southern European countries. The second one is that the large accumulation of Target2 claims by the Bundesbank represents an unacceptable risk for Germany if the eurozone were to break up. We argue that these claims are unfounded. They also lead to unnecessary fears in Germany that make a solution of the eurozone crisis more difficult. Ultimately, this fear increases the risk of a break-up of the eurozone. Or to paraphrase Franklin Roosevelt, what Germany should fear most is simply its own fear.

The relationship between fiscal and current account balances in the Caribbean

Includes bibliography

The grand divergence: global and European current account surpluses. Bruegel Working Paper 2015/08, 13 August 2015

Global current account imbalances widened before the 2007/2008 crisis and have narrowed since. While the post-crisis adjustment of European current account deficits was in line with global developments (though more forceful), European current account surpluses defied global trends and increased. We use panel econometric models to analyse the determinants of medium-term current account balances. Our results confirm that higher fiscal balances, higher GDP per capita, more rapidly aging populations, larger net foreign assets, larger oil rents and better legal systems increase the medium-term current account balance, while a larger growth differential and a higher old-age dependency ratio reduce it. European current account surpluses became excessive during the past twelve years according to our estimates, while they were in line with model predictions in the preceding three decades. Generally, the gap between the actual current account and its fitted value in the model has a strong predictive power for future current account changes. Excess deficits adjust more forcefully than excess surpluses. However, in the 2004-07 period, excess imbalances were amplified, which was followed by a forceful correction in 2008-15, with the exception of European surpluses.

The Drivers of Current Account Surplus in Germany and the Politics of Rebalancing in the Eurozone. EU Centre, Singapore Working Paper No. 24, April 2015

Current account deficits have caught the public’s attention as they have contributed to the European debt crisis. However, surpluses also constitute an issue as a deficit in any country must be financed through a surplus in another country. In 2013, Germany, now the world’s largest surplus economy, registered a record high US$273 billion surplus. This paper looks at what accounts for Germany’s surplus, revealing that the major driving factors include strong global demand for quality German exports, domestic wage restraint, an undervalued single currency, high domestic savings rate and interest rate convergence in the euro area. This paper echoes the US Treasury’s view that a persistent German surplus makes it harder for the eurozone as a whole and the southern peripheral economies in particular to recover from the current financial crisis by imposing a Europe-wide “deflationary bias” through pushing up the exchange rate of the euro, exporting feeble German inflation and projecting its ultra-tight macroeconomic policies onto crisis economies. This paper contends that Germany’s trade surplus is likely to endure as Germany and other eurozone countries uphold diverging views on the nature of the surplus engage in a blame-game amidst a sluggish rebalancing process. Prizing the surplus as a reflection of hard work and economic competitiveness, German authorities urge their southern eurozone colleagues to undertake bold structural reforms to correct the imbalance, while the hand-tied governments in crisis-stricken economies call on Germany to do its “homework” by boosting German demands for European goods and services.

The current account, fiscal policy, and medium-run income determination

This article presents a new framework for analyzing the simultaneous determination of current account imbalances and the path of national income. Using standard macroeconomic behavioral relationships, it first examines how and why current account deficits matter by investigating links between domestic consumption, government spending, output, saving, investment, interest rates, and capital flows. Central to the model is the distinction between aggregate output and expenditure that enables dissection of the effects of discretionary fiscal change on the current account and national income. The framework yields results relevant to the twin deficits hypothesis that are contrary to those of standard models.

Current Account ‘Core-Periphery Dualism’ in the EMU. CEPS Working Document No. 406/March 2015

Current account dispersion within EU member states has been increasing since the 1990s. Interestingly, the persistent deficits in many peripheral countries have not been accompanied by a significant growth process that is able to stimulate a long-run rebalancing, as neoclassical theory predicts. To shed light on the issue this paper investigates the determinants of eurozone current account imbalances, focusing on the role played by financial integration. The analysis considers two samples of 22 OECD and 15 EU countries; three time horizons corresponding to various steps in European integration; different control variables; and several panel econometric methods. The results suggest that within the OECD and EU groups, financial integration helped to explain CA deterioration in the peripheral countries, especially in the post-EMU period. The business cycle seems to have played a growing role over time, whereas the role of competiveness seems to have diminished.

Policies for reducing the current-account deficit.

Mode of access: Internet.

The Exchange Rate in a Dynamic-Optimizing Current Account Model with Nominal Rigidities: a Quantitative Investigation.

This paper studies a dynamic-optimizing model of a semi-small open economy with sticky nominal prices and wages. the model exhibits exchange rate overshooting in response to money supply shocks. the predicted variability of nominal and real exchange rates is roughly consistent with that of G7 effective exchange rates during the post-Bretton Woods era.

Reviewing the sustainability/stationarity of current account imbalances with tests for bounded integration

We investigate for 26 OECD economies whether their current account imbalances to GDP are driven by stochastic trends. Regarding bounded stationarity as the more natural counterpart of sustainability, results from Phillips–Perron tests for unit root and bounded unit root processes are contrasted. While the former hint at stationarity of current account imbalances for 12 economies, the latter indicate bounded stationarity for only six economies. Through panel-based test statistics, current account imbalances are diagnosed as bounded non-stationary. Thus, (spurious) rejections of the unit root hypothesis might be due to the existence of bounds reflecting hidden policy controls or financial crises.

Current account and capital mobility hypothesis: Evidence from the G-7

This paper investigates an intertemporal optimization model in order to analyze the current account of the G-7 countries, measured as the present value of the future changes in net output. The study compares observed and forecasted series, generated by the model, using Campbell & Shiller’s (1987) methodology. In the estimation process, the countries are considered separately (with OLS technique) as well as jointly (SURE approach), to capture contemporaneous correlations of the shocks in net output. The paper also proposes a note on Granger causality and its implications to the optimal current account. The empirical results are sensitive to the technique adopted in the estimation process and suggest a rejection of the model in the G-7 countries, except for the USA and Japan, according to some papers presented in the literature.

Some notes about the determination of current account equilibrium real exchange rate and the relation between real exchange rate and productive specialization

The objective of these notes is to present a simple mathematical model of the determination of current account real exchange rate as defined by Bresser-Pereira (2010); i.e. the real exchange rate that guarantees the inter temporal equilibrium of balance of payments and to show the relation between Real Exchange rate and Productive Specialization at theoretical and empirical level.

Do private sectors deficits matter?

Includes bibliography