Determinants of current account in the EU: the relation between internal and external balances in the new members

This paper considers the major determinants of the current account in the new members of the EU. It examines the long-run and short-run impact of real exchange rate, investment, private and public savings on current account. The bounds testing autoregressive distributed lag (ARDL) approach to cointegration is used and the results indicate that twin deficit exists; in another words, government budget deficit shocks have led to deficit in current accounts in Czech Republic, Latvia, Lithuania, Slovenia and Slovakia for the considered period. At the same time, empirical evidence was found that private savings, investment and real exchange rate are key variables as well, causing changes in the current account in the long-run as well as in the short-run. Finally, stability tests were applied to the model indicating no evidence of any structural instability in the model of these countries.