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CURRENT ACCOUNT DETERMINANTS AND EXTERNAL SUSTAINABILITY IN PERIODS OF STRUCTURAL CHANGE

Sophocles N. Brissimis

Bank of Greece and University of Piraeus

George Hondroyiannis

Bank of Greece and Harokopeio University

Christos Papazoglou

Bank of Greece and Panteion University

Nicholas T. Tsaveas

Bank of Greece

Melina A. Vasardani

Bank of Greece and European Central Bank

 

ABSTRACT

The aim of this paper is to study the main macroeconomic, financial and structural characteristics that affected current account developments in Greece over the period 1960-2007 and link these to the issue of external sustainability. Concerns over Greece’s external sustainability have emerged since 1999 when the current account deficit widened substantially and exhibited high persistence. The empirical model used, which theoretically rests on the intertemporal approach, treats the current account as the gap between domestic saving and investment. We examine the behaviour of the current account in the long run and the short run using co-integration analysis and a variety of econometric tests to account for the effect of significant structural changes in the period under review. We find that a stable equilibrium current account model can be derived if the ratio of private sector financing to GDP, as a proxy for financial liberalization, is included in the specification. Policy options to restore the country’s external sustainability are explored by performing a simulation exercise based on the estimated equilibrium model.

JEL classification: F30; F32

Keywords: Current account model; external sustainability

Acknowledgements: Paper presented at the Eurosystem Seminar “Detecting Macroeconomic Imbalances in the Euro Area Countries” on 11-12 May 2009 in Frankfurt am Main. We are grateful to Eurosystem’s Seminar participants, as well as George Oikonomou, George Demopoulos, Heather Gibson, Stephen Hall, Petros Migiakis, Angelos Kanas, other staff members of the Bank of Greece and, in particular, an anonymous referee for their comments and useful discussions. The views expressed in this paper do not necessarily reflect those of the Bank of Greece or the Eurosystem.

 

Correspondence:

Sophocles N. Brissimis

Bank of Greece
21, E. Venizelos Ave.,
102 50 Athens, Greece

tel.  + 30 210 3202388

Email: sbrissimis@bankofgreece.gr



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