Long-run determinants of current accounts in OECD countries: Lessons for intra-European imbalances

•We estimate long-run determinants of current account with panel cointegration.•Structural external imbalances are then computed.•This allows one to identify structural factors explaining persistent imbalances.•Adjustment to equilibrium is estimated with linear and asymmetric panel VECM.•The speed of convergence is much faster in deficit countries than in surplus ones.

In this paper we study the long-run determinants of current account balances in 21 OECD countries. We define long-run targets to determine whether actual current account balances are in line with their equilibrium values and find that, following the crisis, the United States, Japan and Spain returned towards their targets but that much remains to be done in Austria, Greece and Germany. Using linear and asymmetric panel VECM models, we find that the speed of convergence of external imbalances is much faster in deficit countries than in surplus ones. These results suggest that the adjustment of intra-European imbalances has to take place in both surplus and deficit countries and should be particularly substantial in the former. This revived the old debate of how to get the surplus countries to adjust.