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)| false ( Ahearne, A., B. Schmitz, and J. von Hagen 2007), “ Internal and External Current Account Balance in the Euro Area,” Joint Bruegel, Korea Institute for International Economic Policy, and Peterson Institute for International Economics Workshop on “ Policy to Reduce Global Imbalances.”
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We gratefully acknowledge helpful comments from Céline Allard, Bas Bakker, Helge Berger, Mali Chivakul, Albert Jaeger, Kenneth Kang, Wojciech Maliszewski, Alasdair Scott, Antonio Spilimbergo, Alexander Tieman, Thierry Tressel, Shengzu Wang, and seminar participants in the European Department.
For this paper, EZ periphery includes the following countries: Greece, Ireland, Portugal, and Spain.
Unlike in the EZ periphery, a good part of foreign capital inflows to emerging Europe was in the form of FDI rather than debt. This reflects the investment needs experienced by many of these emerging market economies that were still undergoing transition and privatization in the run-up to the crisis. A higher share of FDI in foreign capital dampened the risk of sudden withdrawal, although the long-term growth-enhancing effect is unclear as much of the FDI in emerging Europe went into non-tradable sectors (see Kinoshita 2011).
With the exception of Bulgaria, Denmark, Finland, Luxembourg, Spain, and Sweden, all other EU countries pursued a pro-cyclical fiscal position during 2003-07, as captured by the cyclically-adjusted fiscal balance in the WEO database. Rahman (2010) shows that most countries in emerging Europe experienced pro-cyclical revenue boom during 2003-7, but only a few countries managed to translate this into higher fiscal space as expenditure policies were also pro-cyclical.
In this paper, we do not attempt to investigate whether adjustment has been “complete” against some equilibrium benchmark, but simply explain how changes in CA balances have been affected by changes in various explanatory variables. This paper also does not address the issue of intra-euro zone imbalances and treats countries in the euro zone as individual countries without exchange rate policy option.
In times of negative output gap, the proportion of credit-constrained households and firms, which adjust spending in response to a change in disposable income, is higher. See Baum and others (2012).
While all three dimensions are clearly interlinked, this simplistic representation nevertheless offers a useful and intuitive framework to analyze the relative importance of different groups of factors on current account developments before and during the crisis.
The crisis dummy variable is equal to one in 2008–11 and zero for other years.
Model findings are robust to the choice of an alter native base year.
These results are robust to alternative choice of variables capturing financing, such as BIS reporting banks’ flows.
During the boom period of 2000-07, fiscal balances in the EM sub-sample changed on average by 0.4 percent of GDP annually.