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Financial Integration and EMU's External Imbalances in a Two-Country OLG Model

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  • Karl Farmer

    ()
    (Karl-Franzens University of Graz)

Abstract

The pronounced increase in external imbalances in the European Economic and Monetary Union (EMU) during the years running up to 2008 is traditionally explained by financial integration through the common currency. This paper examines in a one-good, two-country overlapping generations' model, with production, capital accumulation and public debt, the effects of financial integration on the net foreign asset positions of initially low-interest and high-interest rate EMU countries. We find that a lower savings rate and government expenditure quota, together with a higher capital production share in the latter can in fact be transformed into the observed external imbalances when interest rates converge.

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Paper provided by University of Graz, Department of Economics in its series Graz Economics Papers with number 2013-07.

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Date of creation: Jul 2013
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Handle: RePEc:grz:wpaper:2013-07

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  1. Francesco Caselli & James Feyrer, 2006. "The Marginal Product of Capital," CEP Discussion Papers dp0735, Centre for Economic Performance, LSE.
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  18. Karl Farmer, 2013. "Financial Integration and EMU's External Imbalances in a Two-Country OLG Model," Graz Economics Papers 2013-07, University of Graz, Department of Economics.
  19. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g7287gghh is not listed on IDEAS
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Cited by:
  1. Karl Farmer, 2013. "Financial Integration and EMU's External Imbalances in a Two-Country OLG Model," Graz Economics Papers 2013-07, University of Graz, Department of Economics.

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