Tradability of output and the current account in Europe

Roman Stöllinger

Article in a refereed journal
International Economics and Economic Policy, 2019

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This paper investigates empirically the relationship between specialisation in the production of tradable output and the current account balance. According to the ‘tradability hypothesis’ that is examined, countries that specialise in highly tradable sectors tend to run current account surpluses while countries with dominant non-tradable sectors risk running current account deficits. In order to test this hypothesis empirically we develop a value-added based tradability index which captures the tradability of a country’s output. Applied to a large sample of European countries, our empirical model provides strong evidence in favour of the tradability hypothesis. The main policy implication is that the anxieties about ‘de-industrialisation’ in large parts of Europe seem justified with a view to growing external imbalances.


Keywords: current account, tradability index, tradable goods, structural change, value added exports

JEL classification: F41, F32, F10, F14

Countries covered: Europe

Research Areas: Macroeconomic Analysis and Policy, International Trade, Competitiveness and FDI

ISSN: 1612-4812