Determinants of Current Account Balances: Evidence from OECD Countries and the European Debt Crisis

Yuhan Wang

doi:10.54691/w7bde388

Authors

Yuhan Wang

DOI:

https://doi.org/10.54691/w7bde388

Keywords:

Current Account Balance; International Trade; European Debt Crisis; Difference-in-Difference.

Abstract

This study investigates the determinants of current account balances in 38 OECD countries between 2002 and 2022, applying a Difference-in-Differences (DID) approach to explore how the European sovereign debt crisis affected current account balances. The empirical model incorporates macroeconomic, fiscal, demographic, and institutional variables to identify key determinants of external balance. Findings reveal that the European sovereign debt crisis significantly improved the current account balances of Eurozone countries. Additionally, government expenditure and economic size negatively correlate with current account balance, while real effective exchange rate appreciation unexpectedly shows a positive relationship. Other determinants, such as trade openness, inflation, aging population, and political stability, show limited or insignificant effects. The findings highlight the importance of fiscal discipline and structural reform in managing external imbalances, particularly during crises.

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