Current account imbalances in the context of European integration

Abstract

This paper presents an empirical investigation of a large number of potentially significant determinants of current account deficits in five EU accession countries (Albania, Croatia, Macedonia, Serbia and Turkey) in the period 2005 Q1-2017 Q4. Using panel regression techniques we find that current account imbalances in the accession countries are mainly determined by domestic investment, financial development, foreign exchange reserves, status of the observed countries in the process of EU enlargement, and the degree of trade openness. Other factors that have a significant impact on current account balances include fiscal deficit, initial net foreign assets, foreign direct investment inflows, and real GDP growth rate. We would like to emphasize that the status of the observed country (an EU candidate or a potential candidate country) does have very significant effect on the current account balance. It is expected that further economic and financial development of the accession countries would encourage domestic saving and contribute to improvement of their current account positions.