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External imbalances in a monetary union. Does the Lawson doctrine apply to Europe?

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  • Mariam Camarero

    (Jaume I University)

  • Josep Lluís Carrion-i-Silvestre

    (University of Barcelona)

  • Cecilio Tamarit

    (University of Valencia)

Abstract

A monetary union raises new economic questions about the interpretation and the implications of high current account de?cits for the economic performance of its members in the medium term. Recent literature has argued that conventional measures of external sustainability are misleading because they omit capital variations on net foreign asset positions. In this paper we analyze external sustainability making use of the database developed by Lane and Milesi-Ferretti (2007a) that incudes these valuation effects. The sample period studied covers from the launching of the monetary integration process in Europe (the creation of the ?European Snake? in 1972) up to 2007. The econometric methodology used accounts for the increasing cross-section dependence among EMU countries as well as possible structural breaks endogenously determined. The results point to the need of abrupt adjustments, either led by the markets or promoted by pro-active policy measures in order to o¤set external disequilibria. The lack of these timely interventions together with the rigidities and institutional imperfections of the present EMU are on the ground of the excessive cost in terms of growth and employment of the current crisis.

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Bibliographic Info

Paper provided by Department of Applied Economics II, Universidad de Valencia in its series Working Papers with number 1006.

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Length: 34 pages
Date of creation: Dec 2010
Date of revision:
Handle: RePEc:eec:wpaper:1006

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Keywords: Current account imbalances; EMU; panel stationarity; structural breaks; cross-section dependence;

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Cited by:
  1. Mariam Camarero & Josep Lluís Carrion-i-Silvestre & Cecilio Tamarit, 2013. "Global imbalances and the Intertemporal External Budget Constraint: A multicointegration approach," Working Papers 1303, Department of Applied Economics II, Universidad de Valencia.
  2. Spahn, Peter, 2012. "Integration durch Währungsunion? Der Fall der Euro-Zone," FZID Discussion Papers 57-2012, University of Hohenheim, Center for Research on Innovation and Services (FZID).

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