Current Accounts in the EU

Abstract

Consumers want to smooth their consumption over time in an intertemporal optimizing model. They borrow against their future income by running current account deficits if their income is expected to increase. Or, they save their current income and run current account surpluses if their future income is expected to decrease. This paper examines if consumers in the EU try to smooth their consumption using current accounts. This paper finds that the current accounts in most EU nations are consistent with a simple intertemporal optimizing model, and therefore the current account imbalances in most EU nations should not present serious problems to policymakers.