Economic Growth, Current Account Dynamics and Growth Regimes in the Baltic States

Talk by Karsten Staehr (Tallinn University of Technology and the Bank of Estonia) as part of the Research Seminar Series of the IOS Economics Department.

This paper considers the growth performance of the Baltic states from the mid-1990s to 2021. Economic growth was fast before the global financial crisis, but slowed markedly after the crisis. Panel data estimations using seemingly unrelated regressions suggest that the dynamics of the current account balance are important for short and medium-term growth in the Baltic states, but that there is a break signifying a change of short-term growth regime around the time of the global financial crisis. Before the crisis, rapid growth was supported by domestic demand that was made possible by large current account deficits. After the crisis, economic growth was supported by external demand reflected in improvements in the current account balances. The shift in the short-term economic growth regime after the global financial crisis has brought not only lower rates of economic growth but also reduced financial vulnerability.