A panel VAR analysis of macro-financial imbalances in the EU

Mariarosaria Comunale

Journal of International Money and Finance, 2022, vol. 121, issue C

Abstract: We investigate the interactions across current account misalignments, real effective exchange rate misalignments and financial gaps within EU countries, applying a Bayesian panel Vector Autoregression to 27 EU members over the period 1994–2012. We find that, for the euro area, the reaction of current account misalignments to a shock in the real effective exchange rate misalignments is the largest. In non-euro area countries and euro periphery an increase in current account misalignments leads to a temporary increase in the real effective exchange rate misalignments, lowering competitiveness and thus amplifying current account fluctuations. For the core, increase in the rate or an expansion of the financial gap may help rebalancing the current account. In the central eastern european members, an increase in the real effective exchange rate misalignments may bring larger current account deficits in the medium-long run. Different policies should be applied to different countries in order to reach a balanced current account and to move close to the equilibrium level of the real effective exchange rate, given real and financial fluctuations. The different directions of transmissions are crucial for defining the right path towards equilibrium and they should be taken into account.

Keywords: Current account; Real effective exchange rate; Financial gaps; Bayesian panel VAR; Foreign capital flows (search for similar items in EconPapers)
JEL-codes: C33 F31 F32 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: A panel VAR analysis of macro-financial imbalances in the EU (2017)
Working Paper: A panel VAR analysis of macro-financial imbalances in the EU (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:121:y:2022:i:c:s0261560621001625

DOI: 10.1016/j.jimonfin.2021.102511

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