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Exchange Rate Misalignments, Fiscal Federalism and Redistribution: How to Adjust in a Monetary Union

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  • Duwicquet, Vincent
  • Mazier, Jacques
  • Saadaoui, Jamel

Abstract

The euro zone crisis illustrates the insufficiency of adjustment mechanisms in a monetary union characterized by a large heterogeneity. Exchange rate adjustments being impossible, they are very few alternative mechanisms. This situation reflects a simple diagnosis. At the level of the whole euro zone, the euro is close to its equilibrium parity. But the euro is strongly overvalued for Southern European countries, France included, and largely undervalued for Northern European countries, especially Germany. In a first step, the paper gives an evaluation of these exchange rate misalignments inside the euro zone, using a FEER approach. Using panel econometric techniques over the period 1994-2011, we confirm that the exchange rate misalignments in the euro zone have diverged, reflecting unsustainable evolutions. Last, we give an estimation of the equivalent transfers in % of GDP implied by these misalignments in the different European countries. In a second step, we use a ‘stock-flow consistent’ model of a monetary union with two countries along the lines of Godley and Lavoie (2007) and Duwicquet and Mazier (2010). A federal budget is introduced with federal expenditures and social transfers financed by federal taxes and euro-bonds issuing. Three results are obtained. The stabilizing role of such a federal budget is confirmed facing asymmetric shock or the negative impact of exchange rate misalignments inside the monetary union. Without such a federal mechanism the overvaluation of the Southern currency (Greek or Spanish euro), facing the undervaluation of the Northern currency (German euro), induces a strong slowdown in the South and a cumulative imbalances within the monetary union. Similarly, the stabilizing role of euro-bonds used to finance European investment projects is illustrated. Their role in the pooling of national debts would be the last point to examine.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 48697.

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Date of creation: 08 Jun 2012
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Handle: RePEc:pra:mprapa:48697

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Keywords: Exchange Rate Misalignments; Adjustments; Monetary Union; Euro Zone Crisis.;

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References

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  1. Virginie Coudert & Cécile Couharde & Valérie Mignon, 2012. "On currency misalignments within the euro area," EconomiX Working Papers 2012-30, University of Paris West - Nanterre la Défense, EconomiX.
  2. Belke, Ansgar & Dreger, Christian, 2011. "Current account imbalances in the euro area: Catching up or competitiveness?," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48711, Verein für Socialpolitik / German Economic Association.
  3. Jamel Saadaoui, 2011. "Exchange Rate Dynamics and Fundamental Equilibrium Exchange Rates," Economics Bulletin, AccessEcon, vol. 31(3), pages 1993-2005.
  4. Se-Eun Jeong & Jacques Mazier & Jamel Saadaoui, 2010. "Exchange Rate Misalignments at World and European Levels: a FEER Approach," Economie Internationale, CEPII research center, CEPII research center, issue 121, pages 25-58.
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  6. Micka�l Clevenot & Yann Guy & Jacques Mazier, 2010. "Investment and the rate of profit in a financial context: the French case," International Review of Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 24(6), pages 693-714.
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Cited by:
  1. Eugenio Caverzasi & Antoine Godin, 2013. "Stock-flow Consistent Modeling through the Ages," Economics Working Paper Archive wp_745, Levy Economics Institute.
  2. Saadaoui, Jamel, 2012. "Déséquilibres globaux, taux de change d’équilibre et modélisation stock-flux cohérente
    [Global Imbalances, Equilibrium Exchange Rates and Stock-Flow Consistent Modelling]
    ," MPRA Paper 51332, University Library of Munich, Germany.

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