Decomposing and Analysing the Determinants of Current Accounts’ Cyclicality: Evidence from the Euro Area

Antonio Afonso and Joao Jalles

Open Economies Review, 2019, vol. 30, issue 1, No 6, 133-156

Abstract: Abstract In this paper, we decompose the current account (CA) balance in 19 Euro area countries into cyclical and non-cyclical components. For the period 1999:Q1 to 2015:Q4, we compute income elasticities of imports and of exports via an alternative novel and improved approach by running time-varying coefficient models country-by-country. Then, in a panel set-up (and controlling for country-invariant characteristics), we uncover that terms of trade have a positive effect on both the cyclical and non-cyclical components of the CA, while the Global Financial Crisis, compensation of employees and the employment level have a negative effect on the cyclical component. Moreover, the crisis had a greater impact on the cyclical component of the CA due to movements in the real effective exchange rate. In addition, we find a negative effect of the crisis on the cyclical component of the CA for countries that received financial assistance from the European Union, notably Ireland, Portugal, Spain and Latvia.

Keywords: Current account cyclicality; Financial markets; Time-varying coefficients (search for similar items in EconPapers)
JEL-codes: C23 F32 G01 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (3)

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Working Paper: DECOMPOSING AND ANALYSING THE DETERMINANTS OF CURRENT ACCOUNTS’ CYCLICALITY: EVIDENCE FROM THE EURO AREA (2018)
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DOI: 10.1007/s11079-018-9503-2

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