Decomposing and analysing the determinants of current accounts’ cyclicality: evidence from the Euro Area

António Afonso, João Tovar Jalles

Research output: Contribution to journalArticle

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.

Original languageEnglish
Pages (from-to)133-156
Number of pages24
JournalOpen Economies Review
Volume30
Issue number1
DOIs
Publication statusPublished - Feb 2019

Fingerprint

Current account
Euro area
Cyclicality
Ireland
Employees
Time-varying coefficient model
Portugal
European Union
Spain
Terms of trade
Latvia
Current account balance
Real effective exchange rate
Income elasticity
Global financial crisis
Import

Keywords

  • Current account cyclicality
  • Financial markets
  • Time-varying coefficients

Cite this

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title = "Decomposing and analysing the determinants of current accounts’ cyclicality: evidence from the Euro Area",
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.",
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Decomposing and analysing the determinants of current accounts’ cyclicality : evidence from the Euro Area. / Afonso, António; Jalles, João Tovar.

In: Open Economies Review, Vol. 30, No. 1, 02.2019, p. 133-156.

Research output: Contribution to journalArticle

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