Have domestic or foreign factors driven European external imbalances?

Anthony J. Makin, Paresh Kumar Narayan

Research output: Contribution to journalArticleResearchpeer-review

7 Citations (Scopus)

Abstract

This paper examines whether domestic or foreign net saving predominantly influences an economy's international borrowing and lending with reference to the experience of western European economies that have had sizable current account surpluses and deficits since the turn of the century. It proposes that if an international lender country's current account surplus is positively (negatively) related to its real long term interest rate, then foreign (domestic) factors are driving its external imbalance. On the contrary, for a foreign borrower country if its current account deficit is positively (negatively) related to its real long term interest rate, domestic (foreign) factors drive its external imbalance. On this basis, it shows econometrically for major European lender economies, Germany, the Netherlands, Switzerland and Sweden, that external imbalances this decade were mainly determined by foreign factors, though by domestic factors for Norway. For major borrower economies, Italy, Spain, Portugal, Ireland and the United Kingdom, the results were not significant implying that neither domestic nor foreign factors predominated over this time.

Original languageEnglish
Pages (from-to)537-546
Number of pages10
JournalJournal of International Money and Finance
Volume30
Issue number3
DOIs
Publication statusPublished - Apr 2011
Externally publishedYes

Keywords

  • Current account imbalances
  • Europe
  • International borrowing and lending
  • Investment
  • Real interest rates
  • Saving

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