Cost competitiveness and asset prices as determinants of the current account in emerging economies

This chapter provides a structured review of the post-Keynesian literature on the determinants of the current account. Our survey reveals two main currents: The trade-centred approach highlights the role of wages in determining the current account. In contrast, the finance-centred approach focuses on financial flows, driven by the return on assets. Within each approach different channels have been identified through which wages and asset returns affect current account positions. To assess their relevance, we review empirical literature on current account determinants in emerging economies. While there is empirical evidence for both trade- and finance-centred channels, previous contributions tend to focus on one of the approaches, thereby omitting important variables. Thus, future analyses of current account imbalances should take both variable groups into account. This is especially relevant in the case of emerging economies that are subject to sudden and drastic changes in the direction of capital flows and potentially face a high price elasticity of demand for their exports