Working Paper: CEPR ID: DP8958
Authors: Philip R. Lane; Barbara Pels
Abstract: The European crisis is partly attributable to the sharp increase in external imbalances across Europe during the pre-crisis period. We examine current account imbalances in Europe over 1995-2007, together with the underlying saving and investment rates (and their subcomponents). We find that the discrete expansion in current account imbalances during the 2002-2007 period can be attributed to a strengthening in the link between growth forecasts and current account balances. A striking pattern was that greater optimism about future growth was associated with lower savings and higher construction investment, rather than investment in productive capital.
Keywords: current account; EMU; Europe
JEL Codes: E63; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| large deficits (H62) | negative economic outcomes (F69) |
| growth expectations (O40) | current account balances (F32) |
| growth expectations (O40) | construction investment (L74) |
| construction investment (L74) | current account balances (F32) |
| growth expectations (O40) | household savings (D14) |
| household savings (D14) | current account balances (F32) |