Abstract
Abstract Following competing theories, the paper brings the determinants of the Serbian and Romanian current account dynamics with policy implications. The research sample consists of quarterly time series data over the period 2004q1–2017q2 and 2007q1-2017q4 for the cases of Serbian and the Romanian case, respectively. The estimates from the state space model with time-varying parameters (TVP) approach suggest that role of domestic demand is significant in both cases even though more prominent in case of Serbia. Marshall-Lerner conditions were fulfilled in case of Serbia while not in the Romanian case. The effects of money supply on the current account is found to be in line with the monetary approach in case of Romania while in the Serbian case the effect of an increase in the money supply is positive. Consequently, to resolve the issue of the current account deficit the research findings suggest the country-specific policy mix for each country.
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