Current Account Dynamics in the Euro Area

This paper investigates the current account (CA) dynamics in the Euro Area by addressing three questions. First, are the vast CA deficits of some Euro Area members still sustainable? Second, what has financed them? Third, what is the reaction of an external shock? The aim of this paper is to address these issues by applying an econometric analysis to the most recent data. The main finding is that the CA does not have to be necessarily stationary. This result does not go in line with what most papers assume and conclude. Last, applying a vector error-correction model (VECM), I conclude that the dynamics of the CA deficits in the Euro Area and bank related net inflows seem to be highly associated. It is also found that CA adjustments do not occur contemporaneously to shocks. However, the adjustment of banking capital flows occurs almost immediately.