Business Intelligence

Current Account Benchmarks For Central And Eastern Europe: A Desperate Search?

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Executive Summary

This paper examines two competing approaches for calculating current account benchmarks, i.e. the external sustainability approach ? la Lane and Milesi-Ferretti (LM) versus the Structural Current Accounts literature (SCA) based on panel econometric techniques. The aim is to gauge the medium term adjustment in current account positions that may be required in some central and eastern European countries. As regards the LM approach, the authors show how the outcome is especially sensitive to the normative choice for external indebtedness and the decision to exclude the foreign direct investment subcomponent from the NFA aggregate. Turning their search to the SCA approach, they assess its sensitivity to model and parameter uncertainty by setting different selection criteria to choose amongst the over 8000 possible combinations of fundamentals.

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