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Adjusting to the euro Author info | Abstract | Publisher info | Download info | Related research | Statistics Gabriel Fagan () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany. )
Vítor Gaspar () (Banco de Portugal, Avenida Almirante Reis, 71-8o, 1150, Lisboa, Portugal. )
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In this paper we argue that, for a group of converging economies of the European Union, participation in the euro area has been associated with easier access to financing by domestic economic agents. Easier access to financing was a significant impulse leading to a sharp increase in households' expenditures and a corresponding fall in the savings ratio. Increased expenditure was associated with current account deficits, a sharp fall in the net foreign asset position and an increase in the households' indebtedness. At the same time there was a sizeable increase in the real exchange rate. In this paper, we show that it is possible to obtain all these qualitative features of adjustment using a simple analytical model of intertemporal equilibrium. Specifically, we consider a simple endowment economy with traded and non-traded goods populated by Blanchard-Yaari households. We also argue that the consideration of external habit formation improves the model's ability to mimic short to medium term adjustment dynamics while, at the same time, improving the plausibility of steady state effects. JEL Classification: F36, E21, F32.
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Paper provided by European Central Bank in its series Working Paper Series with number
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Length: 42 pages
Date of creation: Jan 2007Date of revision:
Handle: RePEc:ecb:ecbwps:20070716Contact details of provider: Postal: Postfach 16 03 19, Frankfurt am Main, Germany Phone: +49 69 1344 0 Fax: +49 69 1344 6000 Web page: http://www.ecb.europa.eu/home/html/index.en.html More information through EDIRC
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Keywords: Euro area interest rate convergence overlapping generations model. Other versions of this item:
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