Current account imbalances in the euro area: Does catching up explain - - PowerPoint PPT Presentation

Current account imbalances in the euro area: Does catching up explain the development?

8th European Seminar 2011 July 7‐10, 2011 ELIAMEP Poros/Greece Ansgar Belke University Duisburg‐Essen & DIW Berlin

Contribution of the paper

• Current account on balance for the entire

euro area

• Imbalances striking for individual members

– Exceed imbalances in the global economy – Deficits of 10 percent in peripheral countries – Divergences increased after euro introduction

• Analysis of factors driving current accounts

– Catching up and competition components – Panel integration and cointegration methods

Current account imbalances

Note: AMECO. Current account to GDP ratio. Surplus: Germany, Netherlands. Deficit: Greece, Portugal, Spain.

Catching up component

• Intertemporal approach to current account
• Imbalances reflect a convergence process

– Poor countries attract foreign capital due to higher growth prospects – Investment exceeds savings over catching up period, implies current account deficits – Higher permanent income perspectives raise private consumption

• Higher foreign debt needs to be financed by

future net exports from tradables sector

Institutional component

• Monetary union facilitated allocation of

investment flows

– Elimination of the exchange rate risk – Access to greater pool of savings

• Interest rate convergence led to large capital

inflows in peripheral countries

– Decrease in real interest rates lowered user costs and caused current account deficits

• Cost advantages reversed due to perception
• f risk after the financial crisis

Competition component

• Indication of excessive borrowing

– Shifts to non‐tradables sector like construction – Overly rosy expectations for convergence – High wage increases reduced competitiveness

• Real exchange rate can drive imbalances

– Changes in relative prices and (labour) costs – Deficit countries lost competitiveness as domestic prices increased more than foreign prices – Real appreciation causes current account deficits

Design of empirical analysis

• Panel of 11 euro area countries, 1982‐2010
• Panel integration and cointegration methods

– Increase in power relative to conventional tests – Cross section correlation

• Potential drivers of current account

– Determinants of savings and investment – Real per capita income, real exchange rate, real interest rate, government debt ratio – Institutional factors by country fixed effects

Panel integration

• Pesaran (2007) approach for the joint null of

a unit root

• Extension of standard ADF regression

– Common components in time series – Cross section averages of lagged levels and first differences – Regressions for individual panel members – Standardized pooled t‐ratio for ADF coefficients – Asymptotically distributed as N(0,1)

Panel cointegration

• Westerlund (2007) tests for joint null of no

cointegration

• Feedback parameter in conditional ECMs

– ECMs estimated for individual panel members, statistics pooled in four ways – Short‐run dynamics and trends can be different

• Panel statistics (restricted version) and group

statistics

– Different consequences, if null is rejected

• Critical values by bootstrap methods

Unit root tests

Levels First differences Current account (ca) 1.283 (0.900)

• 3.751

(0.000) Real per capita income (ypc) 0.624 (0.734)

• 3.178

(0.001) Real effective exchange rate (rer)

• 0.131

(0.448)

• 5.279

(0.000) Long term real interest rate (rl)

• 0.741

(0.229)

• 6.519

(0.000) Government debt ratio (debt) 1.777 (0.962)

• 2.765

(0.003)

Cointegration tests

Gτ Gα Pτ Pα ca, ypc

• 2.754

(0.005)

• 0.752

(0.056)

• 3.882

(0.004)

• 4.085

(0.004) ca, rer

• 1.873

(0.095)

• 0.320

(0.191)

• 3.291

(0.044)

• 3.571

(0.055) ca, ypc, rer

• 2.766

(0.028)

• 0.411

(0.121)

• 3.340

(0.026)

• 2.698

(0.048) ca, ypc, rer, rl

• 1.982

(0.096) 0.518 (0.230)

• 2.535

(0.028)

• 1.284

(0.094) ca, ypc, rer, debt

• 2.645

(0.050) 0.374 (0.236)

• 3.073

(0.054)

• 2.119

(0.064) ca, ypc, rer, rl, debt

• 0.168

(0.339) 2.024 (0.436)

• 1.723

(0.066)

• 0.645

(0.108)

Current account determinants

1982-2010 1991-2010 1982-2010 1991-2010 1982-2010 1991-2010 ypc 0.063 (0.014) 0.006 (0.022) 0.056 (0.014) 0.012 (0.022) 0.016 (0.019)

• 0.016

(0.028) rer

• 0.164

(0.014)

• 0.150

(0.019)

• 0.161

(0.014)

• 0.144

(0.019)

• 0.168

(0.014)

• 0.154

(0.019) rl 0.007 (0.003) 0.008 (0.003) debt

• 0.026

(0.007)

• 0.016

(0.012) R2 0.714 0.770 0.733 0.777 0.724 0.771

Current account determinants (II)

1982-2010 1991-2010 1982-2010 1991-2010 1982-2010 1991-2010 ypc 0.220 (0.033) 0.212 (0.053) 0.227 (0.034) 0.216 (0.052) 0.290 (0.038) 0.303 (0.062) rer

• 0.094

(0.026)

• 0.052

(0.038)

• 0.102

(0.026)

• 0.060

(0.038)

• 0.027

(0.032) 0.019 (0.046) rl 0.008 (0.004) 0.008 (0.004) debt 0.064 (0.019) 0.093 (0.037) R2 0.491 0.397 0.502 0.413 0.534 0.438

Surplus countries

Current account determinants (III)

Deficit countries

1982-2010 1991-2010 1982-2010 1991-2010 1982-2010 1991-2010 ypc 0.032 (0.014)

• 0.020

(0.019) 0.018 (0.013)

• 0.021

(0.019)

• 0.068

(0.027)

• 0.093

(0.030) rer

• 0.232

(0.016)

• 0.241

(0.020)

• 0.229

(0.015)

• 0.251

(0.022)

• 0.200

(0.017)

• 0.228

(0.019) rl

• 0.001

(0.003)

• 0.004

(0.004) debt

• 0.047

(0.011)

• 0.044

(0.014) R2 0.751 0.863 0.802 0.864 0.784 0.877

Higher German wages?

• Deceleration of unit labour costs improved

competitiveness

– High productivity, low wage growth – Deflation in deficit countries avoided by higher wage increases?

• Does not necessarily reduce imbalances

– Deterioration of competitiveness not feasible – Export performance relies on investment goods – Export shares to euro area did not increase

Export shares

2 4 6 8 10 1995 1997 1999 2001 2003 2005 2007 2009 20 22 24 26 28 30 EL (lhs) IE (lhs) PT (lhs) ES (lhs) DE (rhs)

Policy implications

• Imbalances driven by competition variables

– Effect most pronounced for deficit countries

• Reduction of imbalances requires asymmetric

policy response

– Deficit countries have to lower unit labour costs

• Due to higher real interest rates, switch to

more labour intensive production in deficit countries required

– Capital inflows can stimulate wage growth in surplus countries

Euro area asymmetries I

Euro area asymmetries II

Euro area asymmetries III

Performance Germany I

Performance Germany II

Performance Germany III

Performance Germany IV

Performance Germany V

Performance Germany VI

Performance Germany VII

Germany – Perceived risks

• Tense fiscal situation worldwide and, particularly,

in the euro area

• Consolidation of public budget (euro rscue

packages inc. ECB exposure,

• Re‐emerging capital market tensions (US, China,

euro area)

• Too early versus too late exit from stimulus

measures

• EUR exchange rate: pain threshold?

Germany – Perceived risks

Have become smaller:

• Effects of the Japanese disasters still unclear
• Increasing prices for commodities (oil, food,

metals)

• Germany: continuously high dependency on

exports (IMF VAR analysis: Germany no origin but

• nly transmitter of positive demand shocks)