The determinants of current account imbalances in the Euro Area: a panel estimation approach

The purpose of this paper is to explore the main macroeconomic, financial and structural factors that influenced current account developments in the euro area countries over the period from 1980 to 2008. The analysis, which theoretically rests on the intertemporal approach, uses a panel consisting of the twelve EU member states that initially joined the euro area, which is then expanded to seventeen countries with the aim to see whether the enlargement or potential enlargement of the euro area would alter the identified set of current account determinants. The results show that factors such as the level of development, demographics, macroeconomic policies and competitiveness, are important in explaining current account positions of individual euro area countries. Moreover, the analysis of short-run dynamics indicates that the EMU has resulted in longer periods of adjustment of current account imbalances.