Essays on current account imbalances

Abstract

Global current account imbalances and intra-euro area imbalances have been at the forefront of academic and policy debates for the last ten years. This thesis examines the determinants of current account balances and external adjustment. It consists of an introduction and four empirical studies. This thesis highlights the importance of institutional factors such as differences in national cultures and cross-country differences in the coordination of wage bargaining on external balances. The first study investigates the effects of deep determinants on current account balances. The point estimates are economically and statistically significant, suggesting that countries populated by Roman Catholics tend to have larger current account deficits than do non-Catholic countries. This finding is supported by microdata on values. The World Values Survey indicates that Roman Catholics do not consider thriftiness as important as other religious groups do. At the macrolevel, this finding is explained, at least to some extent, by an inclination of Catholic countries toward uncertainty avoidance. The second study examines the determinants of the speed of adjustment of the current account toward its long-run equilibrium. The rate of current account reversion decreases monotonically with the degree of coordination of wage bargaining; that is, fragmented firm-level wage bargaining facilitates external adjustment. In addition, there is a negative interaction between the effects of the coordination of wage bargaining and exchange rate stability on the rate of current account reversion. In the third and fourth studies, a country’s intra-euro area trade balance is distinguished from its trade balance with the rest of the world. The third study shows that intra-euro trade balances have not become more sensitive to differences in per-capita incomes and also suggests that a variable measuring differences in national cultures (i.e., the dimension of individualism-collectivism) has explanatory power on intra-euro trade balances over the standard economic variables. The fourth study indicates that in spite of increased integration, there remain significant differences in the long-run relations among trade balance, real effective exchange rate, domestic GDP and foreign GDP trade balance across the EMU-12 countries.