Abstract

AbstractSubstantial capital outflows across Europe following the 2007/8 Global Financial Crisis and 2010 European Sovereign Debt crisis raise concerns regarding potential capital outflows from the economies of Central and Eastern European countries. To shed light on country‐level factors that can mitigate crisis and potential capital outflows across these countries, this article investigates which factors have influenced the evolution of their current accounts. Our analyses, using dynamic ordinary least squares, suggest that the long‐run determinants of the current account have indeed changed over time, and threshold cointegrated estimates also confirm that, for each country, the parameters are dependent on thresholds for certain variables and there is significant heterogeneity across the countries. Our overall results are robust to complementary analyses, such as threshold estimation approach. We comment on some possible implications of these differences.

Highlights

  • Periods of significant capital outflows from many European countries in recent years, following the global financial crisis (GFC) of 2007/8 and the European sovereign debt crisis of 2010, have underscored the need for better understanding of the factors that determine a country's current account position

  • The mechanics of the Eurosystem's TARGET2 system prevent a sudden stop for euro area countries as foreign private debt is substituted by foreign public debt in the event of a crisis, so to that extent, being inside the euro is likely to be a structural break in terms of foreign funding which further underscores the relevance of considering structural breaks in empirical work

  • A plausible reason for this effect of investments on the current account deficit is that, typically, the Central and Eastern European Countries (CEECs) have been characterized by relatively low household saving rates; and the current account can be expressed as the difference between national savings and investment

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Summary

Introduction

Periods of significant capital outflows from many European countries in recent years, following the global financial crisis (GFC) of 2007/8 and the European sovereign debt crisis of 2010, have underscored the need for better understanding of the factors that determine a country's current account (hereafter CA) position. The mechanics of the Eurosystem's TARGET2 system prevent a sudden stop for euro area countries as foreign private debt is substituted by foreign public debt in the event of a crisis, so to that extent, being inside the euro is likely to be a structural break in terms of foreign funding which further underscores the relevance of considering structural breaks in empirical work This study highlights this as a gap in the literature and contributes to this discussion by assessing the significance of the factors that determine the current account in the Central and Eastern European Countries (CEECs). As the CEECs have moved towards the market economy and joined the EU, arguments of over- or under-adjustment to integration have been put posited (see Blanchard, 2006; Blanchard & Giavazzi 2002) as likely explanations for their observed CA movements

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