The Determinants of the Greek Current Account Deficit: The EMU Experience

Abstract In this paper we investigate empirically, the factors that have affected the current account balance in the Greek Economy, primarily after the EMU accession. Using the Johansen Cointegration analysis and Error Correction Model (ECM) on quarterly data over the period 1995Q1 – 2006Q4 period, we test for the empirical importance of the factors that contributed to the recent widening of the Greek current account deficit. In particular, it is shown that, from a point of a long-run perspective, the deterioration of competitiveness, the ongoing process of real convergence, which has been primarily facilitated by strong credit growth reflecting the impact of financial liberalization and lower interest rates, the cyclical position of the Greek economy and to lesser extent the fiscal expansion, have all contributed to higher current account deficits. Also, significant role on the short-run dynamics of the current account has been played by two exogenous factors involving developments in oil and freight prices.