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

Financial globalisation has been associated with divergent current account patterns inemerging market economies. While countries in emerging Asia have been runningsizeable current account surpluses, countries in emerging Europe have been facing largecurrent account deficits. In this paper we test for the relevance of financial marketcharacteristics in explaining divergent current account patterns in emerging Europe andemerging Asia based on the assumption that both regions constitute two differentconvergence clubs with the euro area and the US representing the core, respectively. Inline with the theoretical literature, we find that better developed and more integratedfinancial markets increase emerging markets´ ability to borrow abroad. The degree offinancial integration within the convergence clubs as well as the extent of reserveaccumulation are found to be the most significant factors to explain divergent currentaccount patterns in emerging Europe and emerging Asia. We conclude that the overallcharacter of integration matters for the pattern of current account developments incatching-up economies.[...]