F32 - Current Account Adjustment; Short-term Capital MovementsReturn

Observing the expanding and high share of export of travel services in both GDP and total export of services in Mediterranean countries, we focus our research on travel service export in twelve countries from 1998 to 2018. We investigated both short-term and long-term significance of export of travel services for GDP growth in Mediterranean countries using the VAR and VECM model and the fixed-effects panel OLS model. In our analysis of significance of export of travel services on current account balance, we applied an accounting approach. Our application of the fixed-effects OLS model on the panel data with GDP growth rate as the dependent variable has shown that, in the short run, export of travel services has a positive impact on GDP growth. In the long run, Granger causality based on block exogeneity Wald tests evidenced that export of travel services has a positive impact on GDP growth, but only at the 10% significance level. Following the accounting approach in our analysis of impact of export of travel services on overall current account balance, we evidenced a strong relevance of export of travel services in achieving current account balance equilibrium.

Over the last two decades, the current accounts in the European Union (EU) have diverged substantially. This divergence has raised concerns about the sustainability of the core countries' current account surpluses since the peripheral countries' financing of their significantly rising levels of current deficits depends on them. In this study, by applying both linear and nonlinear unit root tests and taking into account structural breaks in the data-generating process, we examine the current account sustainability of the main core countries with large external surpluses. We find that the current accounts of Austria, Denmark and Germany are not on sustainable paths, which suggests that the core economies might not continue to run surpluses to finance the peripheral countries' external deficits. The results of this study imply that the policymakers in peripheral countries might take proactive measures against possible borrowing problems and capital outflow risk in the future.

This paper investigates effects of the real exchange rate and its volatility on trade balance and real GDP using a set of eighteen countries, mainly the OECD developed countries. The paper reports econometric procedures and empirical estimates for major currency-owned large economies and non-major currency- owned countries. One task, for which the elasticities of international trade and real GDP are needed, is developing exchange rate assessments. The study finds that real currency depreciation leads to improvement of trade balance in most of the examined developed countries. But the trade balances after real depreciation of currency do not follow J-curve patterns. With regard to the real exchange rate variability, the evidence is mixed. Similarly, effects of the real currency devaluation on real GDP differ across countries. Also, we observe that major currency-owned countries could have different value-and-volume-effects with non-major currency countries.

This paper is an application of the consumption-smoothing current account theory the main principles of which appeared in the 1980s and gradually broadened to describe the intertemporal dynamics of important economic processes. In open economies, the consumption-smoothing current account process is related to the consumption behaviour of households. The effect on consumption choices and the current account is derived from the premise that households adjust their consumption expenditures according to the terms of trade. The process can be treated in an optimizing framework and originally was strictly connected to the permanent income hypothesis (PIH) and no restrictions to capital mobility. Both assumptions were successively relaxed and relationships allowing incorporation of the excess sensitivity hypothesis (ESH) and not perfect capital mobility have been introduced. Transformed into a VAR model with current account and national cash flow increments as endogenous variables, relevant conclusions are drawn on the basis of Granger causality, the equivalence of the current and predicted current account and an analysis of parameters of the model. Basic relationships and solutions are summarized and an application using the economies of the Czech Republic, Slovakia and Austria follows.

In this article we analyse the evolution of the relationship between budget and trade deficits in Turkey covering the period 1985:1 to 2013:4. The structural break tests suggest the existence of a regime shift after the severe 2001 crisis. Time-varying responses obtained from the TVP-VAR model up to 2003 support the Keynesian view by providing evidence in favour of twin deficits, whereas the remaining responses suggest the remarkable divergence between fiscal and trade deficits.

The purpose of this study is to determine the validity of the triplet deficit hypothesis, which means the savings gap and budget deficit effect on the current account deficit. The empirical model is estimated for the G7 countries during the period between 1994 and 2011. The findings show that budget deficit and savings gap have important role in current account deficit in terms of estimator results. Moreover, bi-directional causality between the current account deficit and the savings gap and between the budget deficit and the savings gap are determined. So, especially the savings gap has an important effect on the current account deficit and the budget deficit. That is, triplet deficit hypothesis is valid in G7. Moreover, traditional approach is also valid since the causality is found between the current account deficit and budget deficit. Thereby, the authors conclude that the choice of statistical tools in analysing the nature of relationship among the current account deficit, the budget deficit, and the savings gap may play a key role for policy makers.

This paper investigates whether UIRP principle holds and what is predominant driving force, which influences exchange rate movement - economic fundamentals or short-term speculative behaviour. Analysis covers seven East European transition countries and empirical data comprise weekly time series ranging from first week in January 2003 to last week in December 2013. The research method is Component-GARCH in Mean Model, which decomposes temporary and permanent element of volatility. The mean and variance equations have been adjusted for the structural breaks' presence in order to improve estimated parameters. The results suggested that UIRP principle does not hold in any country. After structural breaks inclusion, we have found that the permanent effect is significant in determination of exchange rate dynamics in five countries, but it does not apply for the transition effect. However, further outliers' purification revealed that only in Serbia short-term transition component plays an important role.

This paper attempts to assess how compatible China is with respect to its dollar-based exchange rate regime. Assessment is made in terms of the real convergence criteria suggested by the optimum currency areas (OCA) theory. In light of the endogenous problem in OCA analysis and this view of convergence criteria, the relevant features of China are evaluated against economies implementing rigid dollar standard in practice, namely Hong Kong, Macau, and Panama. Findings suggest that economic conditions in China broadly conform to those prevailing in these economies which maintain strong links to the US dollar.

This article examines the main current account balance determinants in order to assess the potential excessiveness of current account deficits in selected transition countries. For this purpose, dynamic panel-regression techniques are used to characterise the properties of current account variations across the transition regions. The results are chiefly consistent with the theoretical and previous empirical analysis, indicating a moderate level of current account deficits persistency and negative effects of economic growth, real appreciation and worsening of terms of trade on the external balances. Furthermore, the validity of the stages of development hypothesis and twin deficit hypothesis, as well as the significance of demographic factors is confirmed in the regions. Finally, the results suggest that most transition countries are justified in running relatively high current account deficits.

The purpose of this study is to investigate the sustainability of current account of 22 OECD countries by employing Liu and Tanner (1996) testing procedure. The procedure used here is to examine stationarity of current account. By using ADF unit root test on single time series, it has been found that current account of most OECD countries have unit root. This outcome, however, might be due to the generally low power of this test. The aim of this paper is to reconsider this issue by exploiting the extra information provided by the combination of the time-series and cross-sectional data and the subsequent power advantages of panel data unit root tests. We apply the test advocated by Im, Pesaran and Shin (1997). According to estimation, current account deficits in OECD countries are sustainable.

The issue of determining inter-market foreign exchange flows under dual exchange markets has been hotly debated. Typically the literature has concentrated on the behavior of the financial premium, leaving aside equally important aspects such the reasons for and characteristics of incomplete separation. Our analytical results suggest that cross transactions arise as long as the government changes the commercial rate. Time inconsistency of policy brings opportunity for leakages between two markets. We also find that the more patient the government, the less likely the occurrence of commercial depreciation and leakages will be. Then reputation could be as a deterrent to leakages

The article presents an empirically tested assessment of the Bank of Slovenia (BS), national central bank, adjustment policy to surges in capital flows during the last decade. Exchange rate appreciation, undeveloped banking sector, immoderate money market oscillation, unstable economic trends (all phenomena that can also be found in other transition countries) are just some of the detrimental effects that can be provoked by surges in capital flows if the national economy is faced with some fundamental sectoral deficiencies. Empirical results indicated that BS quite successfully mitigated listed effects of excessive foreign currency inflows during the last decade. With the suitable combination of direct and indirect adjustment methods, BS succeeded in preventing, still vulnerable Slovenian economy from a major form of financial crisis and stronger nominal tolar appreciation (this was not the case in some other countries like Hungary, Poland, Czech Republic, Croatia) although there was some real appreciation.

The paper discusses the prospects for capital inflows to the Czech Republic before Economic and Monetary Union accession. It reviews the potential costs and benefits of capital flows and the history of capital flows to the Czech Republic, before turning to future capital inflows. It notes that different theoretical models provide different predictions about future capital inflows. To get further insight, the paper discusses the future capital inflows from the perspective of nonresidents' supply of external savings and residents' demand for external borrowing and from the perspective of external vulnerability related to large foreign direct investment (FDI) inflow. It concludes that FDI is likely to decline somewhat in the future, but increasing sovereign borrowing needs could lead to higher inflow of portfolio capital. The final section discusses the potential for capital inflows resulting from the so-called convergence plays and concludes that there is presently little incentive for convergence-play related capital inflows.