Have Domestic or Foreign Factors Driven European External Imbalances?

Posted: 7 Jun 2012

See all articles by Anthony J. Makin

Anthony J. Makin

Griffith University - Griffith Business School

Paresh Kumar Narayan

Deakin University - School of Accounting, Economics and Finance

Date Written: 2011

Abstract

This paper examines whether domestic or foreign net saving predominantly influences an economy's international borrowing and lending with reference to the experience of western European economies that have had sizable current account surpluses and deficits since the turn of the century. It proposes that if an international lender country's current account surplus is positively (negatively) related to its real long term interest rate, then foreign (domestic) factors are driving its external imbalance. On the contrary, for a foreign borrower country if its current account deficit is positively (negatively) related to its real long term interest rate, domestic (foreign) factors drive its external imbalance. On this basis, it shows econometrically for major European lender economies, Germany, the Netherlands, Switzerland and Sweden, that external imbalances this decade were mainly determined by foreign factors, though by domestic factors for Norway. For major borrower economies, Italy, Spain, Portugal, Ireland and the United Kingdom, the results were not significant implying that neither domestic nor foreign factors predominated over this time.

Suggested Citation

Makin, Anthony J. and Narayan, Paresh Kumar, Have Domestic or Foreign Factors Driven European External Imbalances? (2011). Journal of International Money and Finance, Vol. 30, pp. 537-546, 2011, Available at SSRN: https://ssrn.com/abstract=2079370

Anthony J. Makin

Griffith University - Griffith Business School ( email )

Brisbane, Queensland 4111
Australia

Paresh Kumar Narayan (Contact Author)

Deakin University - School of Accounting, Economics and Finance ( email )

221 Burwood Highway
Burwood, Victoria 3215
Australia

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