Current account and productivity: evidence for some European countries

In this paper we investigate the role of productivity shocks, in combination with investment behaviour, as a source for current account dynamics for some European countries during the period 1960-2000. We find a negative relationship between specific productivity levels and current accounts in the cases of Belgium, Denmark, Germany, France, Ireland, Luxembourg, Netherlands and Portugal, which suggests that the current accounts of these countries are counter-cyclical. In contrast, the current accounts of some countries such as Greece, Spain, Italy and Austria do not respond at specific productivity changes. The policy maker needs to take into account the relationship between the current account and productivity shocks when current account forecasts are generated and policies are decided.