Author(s): Julia Lendvai, Werner Roeger, European Commission
This paper studies external deficits in the Baltics between 1995 and 2007.
It uses a calibrated small-open-economy dynamic general equilibrium model incorporating a financial accelerator to assess to what extent deficits can be explained by productivity growth, fall in spreads and increasing access to credit.
Results suggest that the external deficit and other key macroeconomic aggregates can be well fitted by the equilibrium response of the model economy. Real convergence is found to have been dominant in the first half of the sample. More reversible financial factors became increasingly important towards the end of the period pointing to growing vulnerability. Positive growth outlook is also likely to have played a significant role in the build up of the foreign debt. Reversal scenarios confirm the need for a sizable readjustment.
|ISBN 978-92-79-14398-4 (online)|
|ISSN 1725-3187 (online)|
Economic Papers are written by the staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission.