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Journal of Economic Integration 2006 September;21(3) :593-618.
Current Account Dynamics in OECD Countries and in the New EU Member States: An Intertemporal Approach

Matthieu BussièreMarcel FratzscherGernot J. Müller 

European Central Bank
Copyright ©2006 Journal of Economic Integration

This paper investigates the large current account deficits observed in most new EU member states using an intertemporal model. The standard model is extended to include: (1) the persistence of current account positions and (2) the relevance of the fiscal balance. Specifically, a closed form solution for consumption in the presence of habit persistence and liquidity constraints is derived, yielding a dynamic model for the current account where fiscal deficits have an effect. The model is estimated for a panel of 33 countries. A key finding is that current accounts in most new EU member states are broadly in line with their structural current account positions.

JEL Classifications: F32, F41

Keywords: Current account | Habit persistence | Liquidity constraint | Transition economies
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