Real Convergence, Financial Markets, and the Current Account - Emerging Europe versus Emerging Asia

51 Pages Posted: 18 Jun 2008

See all articles by Sabine Herrmann

Sabine Herrmann

Deutsche Bundesbank - Economic Research Centre

Adalbert Winkler

Frankfurt School of Finance & Management gemeinnützige GmbH

Date Written: June 2008

Abstract

Global financial integration has been associated with divergent patterns of real convergence and the current account in emerging markets. While countries in emerging Asia have been running sizeable current account surpluses, countries in emerging Europe have been facing large current account deficits. In this paper we test for the relevance of financial market characteristics in explaining this divergence in the catching-up process in Europe and Asia. We assume that the two regions constitute distinct convergence clubs, with the euro area and the United States respectively at their core. In line with the theoretical literature, we find that better developed and more integrated financial markets increase emerging markets' ability to borrow abroad. Moreover, the degree of financial integration within the convergence clubs - as opposed to the state of financial integration in the global economy - and the extent of reserve accumulation are significant factors in explaining the divergent patterns of real convergence and the current account in the regions under review.

Keywords: real convergence, economic integration, saving and investment, current account developments, financial markets, emerging market economies

JEL Classification: F15, F21, O16, O52, O53

Suggested Citation

Herrmann, Sabine and Winkler, Adalbert, Real Convergence, Financial Markets, and the Current Account - Emerging Europe versus Emerging Asia (June 2008). ECB Occasional Paper No. 88, Available at SSRN: https://ssrn.com/abstract=1084928

Sabine Herrmann (Contact Author)

Deutsche Bundesbank - Economic Research Centre ( email )

Wilhelm-Epstein-Strasse 14
Frankfurt/Main D-60431
Germany

Adalbert Winkler

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

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