Log in

PKSG Working Paper Series

Working Paper PKWP1716

Are current accounts driven by competitiveness or asset prices? A synthetic model and an empirical test

November 2017

Alexander Guschanski, Engelbert Stockhammer

This paper analyses the emergence of current account imbalances as a result of the co-existence of trade flows and financial flows. The literature has tended to view these factors in isolation: many post-Kaleckian models, as well as Net-saving approaches assume that financial flows will adjust to trade flows. Models focusing on financial crises feature a strong role for financial flows but ignore drivers of trade flows. Similarly, empirical analyses either ignore drivers of financial flows or insufficiently capture determinants of trade flows. The paper, first, proposes a simple macroeconomic framework of the current account which gives equal emphasis to trade flows, determined by price competitiveness, and financial flows, determined by asset prices. Second, we test a reduced form of the model for 28 OECD countries for the period 1971-2014. Our results indicate that cost competitiveness as well as asset prices play a role in the determination of current accounts, but asset prices have dominated in the last two decades.

Keywords: current account, financial flows, competitiveness, asset prices

JEL classification: E12: General Aggregative Models: Keynes; Keynesian; Post-Keynesian F32: Current Account Adjustment; Short-term Capital Movements F41: Open Economy Macroeconomics

Download: Working Paper PKWP1716