Current Account and Reer Misalignments in Central Eastern EU Countries: An Update Using the Macroeconomic Balance Approach

Abstract

Following the IMF CGER methodology, we conduct an assessment of the current account and competitiveness of the EU new member states (here defined as Central Eastern European Countries, CEECs, which joined the EU between 2004 and 2014). We present results for a method called the “Macroeconomic Balance (MB) approach” which provides a measure of current account equilibrium based on its determinants together with misalignments in the real effective exchange rates. We use a panel setup of 11 EU new member states (Croatia is included) over the period 1994-2012 in static and dynamic frameworks, also controlling for the presence of cross-sectional dependence, checking specifically for the role of exchange rate regimes, capital flows and global factors. We find that the estimated coefficients for the determinants are in line with the expectations. Moreover, the foreign capital flows, the oil balance and relative output growth seem to play a crucial role in explaining the current account. Some global factors like shocks in oil prices or supply might have played a role in worsening, the current account balance of the CEECs. Having a pegged exchange rate regime (or being part of the euro zone) affects the current account positively, but the resulting misalignments for the current account and the real effective exchange rates are bigger. The real effective exchange rates behave in line with the current account gaps, which experience a clear cyclical behaviour. When the Foreign Direct Investments (FDIs) are introduced as a determinant for these countries, the misalignments are larger in the boom periods (positive misalignments); while the negative misalignments are smaller in magnitude.