On the Empirical Evidence of the Intertemporal Current Account Model for the Euro Area Countries

A simple intertemporal current account model is found to explain successfully the current account configuration in the euro area before the Great Recession. The analysis suggests that consumption smoothing, prompted by expectations of economic convergence and the removal of exchange rate risk, has been an important driving force for the build-up of current account divergence in the euro area since the creation of monetary union. The model also predicts that current account deficits and surpluses would narrow under a post-crisis scenario of moderate catching-up and more segmented bond markets.