8/2018 Kersti Harkmann, Karsten Staehr. Current account dynamics and exchange rate regimes in Central and Eastern Europe

Working Papers of Eesti Pank 8/2018

The paper seeks to determine the factors that drive the current account dynamics of the 11 EU members from Central and Eastern Europe (CEE). Panel data models are estimated on annual data for the period 1997–2017 and both domestic pull factors and external push factors are included. The models are, as a key innovation, estimated separately for floating and fixed exchange rate regimes. The current account exhibits substantial persistence in both cases. For the floaters, the current account has been driven by domestic factors while external factors appear unimportant. For the fixers, the current account has mainly been driven by external factors, suggesting there is substantial vulnerability to external developments. The analysis underscores the importance of the exchange rate regime for the drivers of the current account balance in the CEE countries.

JEL Codes: F32, F33, P33

Keywords: current account balance, exchange rate regime, economic policies, Central and Eastern Europe

The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank, the European Central Bank or other parts of the Eurosystem.