Assessing the effectiveness of the exchange rate movements on the Greek current account deficit : a cointegration analysis

Using the Johansen Cointegration analysis, Error Correction Modeling (ECM) and Granger Causality on annual data over the 1963 – 2003 period, it is shown that there is a long and short run relationship between the Greek current account deficit and the real effective exchange rate of the Greek currency with the currencies of European Union (EU-15) countries, which are partners of Greece in EU-15. The empirical evidence reveals one – way causality from current account deficit to GDP, RER, GDP11, M3 and BD. The specification and diagnostic tests yield satisfactory results, indicating that the ECM estimates are consistent with the empirical framework.peer-reviewe

Testing the degree of openness of the Greek capital account : a cointegration analysis

The issue of capital mobility and the related issue of financial market integration is one of the most pronounced cases of contradiction between casual empiricism and conventional wisdom, in the one hand, and the results of formal empirical testing on the other. The question of the degree of capital mobility is an important one in economic analysis. This is because the assumptions one makes about the degree to which capital is mobile internationally can significantly influence the conclusions of the analysis. Over the past decade developing countries have experienced a continuing process of financial market liberalization and growing financial flows. Measuring the degree of capital mobility – defined as the degree of linkage between domestic and foreign interest rates – is central to our understanding and assessment of financial liberalization and its consequences. There are some methodological issues concerning the degree of capital mobility: The connection between capital mobility and market integration seems to be clear; if markets are integrated then capital will move more freely. Feldstein and Horioka (1980) have proposed to measure capital mobility using the degree of correlation between saving and investment rates. The Ferdstein-Horioka criterion also implies that capital mobility can be measured on the basis of differential (nominal and real) rates of interest. However, other researchers argued that the saving-investment correlation is not a proper measure of the degree of capital mobility and market integration (Goldstein et al, 1991), Frankel and MacArthur (1988). In this paper, following Edwards and Khan (1985), the domestic interest rate is hypothesized to depend on weighted average of domestic and foreign factos. The approach that was used is maximum likelihood cointegration analysis of Johansen (1988), and Johansen and Juseliu (1990). The results support the impact of both domestic and international influences on the domestic rate in the case of Greek economy. The evidence based on the Edwards and Khan (1985) approach seems to support the hypothesis of high (but not perfect) capital mobility in the Greek economy. The capital is highly mobile.peer-reviewe