Current Account Sustainability in the Central and Eastern Europe: Framework for Analyzing External Imbalances

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 research the common criteria of assessing the current account sustainability are discussed and a framework for analyzing external imbalances in transition economies is provided. This study uses a model of the current account to analyze the fluctuations in current account balances experienced by CEECs over the period of EU membership and to highlight one of its main determinants ? external indebtedness of a country. A vector autoregression (VAR) model is used to test the causal relationships between the current account and the external debt in five CEECs. 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.