EXTERNAL DEBT DYNAMICS AS A FACTOR OF THE CURRENT ACCOUNT SUSTAINABILITY IN THE CENTRAL AND EASTERN EUROPEAN COUNTRIES

Abstract

Current accounts have diverged substantially among the Central and Eastern European Countries (CEECs). This divergence has raised concerns about the sustainability of countries’ external indebtedness. In this paper the external imbalances of CEE economies are discussed. A vector autoregression (VAR) model is used to test the causal relationships between the current account and the external debt in five CEECs. Namely, using VAR framework, Granger causality testing is performed and variance decomposition is undertaken to see the relative contribution of three different sources of debt (government, banking sector or corporate sector’s debt) to the current account deficits. The results of the research show that high external debt accumulation may be a major cause of current accounts instability in CEECs. The recommendations to decrease dependence of the CEE economies on external financing to prevent national economies from currency, debt and financial crises are suggested.

Key words: external imbalances, current account deficits, capital flows, exter-
nal debt