Determinants of the Current Account Balances among Central and Eastern European Countries in the European Union

Abstract

This study examines whether the financial market development and integration have affected the current account balances in the European Union (EU) countries in Central and Eastern Europe (CEE) during 1996-2015. First, the results suggest that the higher bank credit flows have resulted in the current account deficits especially after EU accession. The larger pool of bank lending flows due to the foreign mergers and acquisitions has helped finance domestic investment. This has led to the larger current account deficits. Second, the results indicate that the larger stock market size due to EU accession has caused current account surpluses rather than deficits. This contradicts the findings of previous studies, which find that higher financial market development leads to current account deficit. Finally, the result confirms that financial integration has facilitated higher current account deficits. The European Monetary Union has eliminated the regulatory restrictions on cross-border capital flows. The increase in foreign capital inflows has helped finance the growing local consumption and investment needs, which has made the CEE countries run the larger current account deficits.