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Fiscal Divergence and Current Account Imbalances in Europe

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  • Schnabl, Gunther
  • Wollmershäuser, Timo

Abstract

Since the breakdown of the Bretton Woods System diverging current account positions in Europe have prevailed. While the Southern and Western European countries have tended to run current account deficits, the current accounts of the Central and Northern European countries, in particular Germany, have tended to be in surplus. The paper scrutinizes the role of diverging fiscal policy stances for current account imbalances in Europe since the early 1970s under alternative institutional monetary arrangements (floating exchange rates, European Monetary System, and European Monetary Union). It sheds light on the interaction of fiscal and monetary policies with respect to their impact on the current account and analyses the role of exchange rate changes and credit facilities as adjustment mechanisms for current account imbalances. Panel regressions reveal a robust impact of fiscal policy divergence on current account imbalances, which to a large extent is independent from the exchange rate regime, but which turns out to be contingent on the monetary policy stance. --

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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79899.

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Date of creation: 2013
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Handle: RePEc:zbw:vfsc13:79899

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  1. International Monetary Fund, 2010. "Fiscal Policy and the Current Account," IMF Working Papers 10/121, International Monetary Fund.
  2. Gunther Schnabl & Holger Zemanek, 2010. "Inter-temporal Savings, Current Account Dynamics and Asymmetric Shocks in a Heterogeneous European Monetary Union," CESifo Working Paper Series 3279, CESifo Group Munich.
  3. Hans-Werner Sinn & Timo Wollmershäuser, 2012. "Target loans, current account balances and capital flows: the ECB’s rescue facility," International Tax and Public Finance, Springer, vol. 19(4), pages 468-508, August.
  4. Kim, Soyoung & Roubini, Nouriel, 2008. "Twin deficit or twin divergence? Fiscal policy, current account, and real exchange rate in the U.S," Journal of International Economics, Elsevier, vol. 74(2), pages 362-383, March.
  5. Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD Publishing.
  6. Andreas Hoffmann & Gunther Schnabl, 2011. "National Monetary Policy, Internatinal Economic Instability and Feeback Effects - An Overinvestment View," Global Financial Markets Working Paper Series 19-2011, Friedrich-Schiller-University Jena.
  7. Jean Pisani-Ferry & Silvia Merler, 2012. "The simple macroeconomics of North and South in EMU," Working Papers 740, Bruegel.
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Cited by:
  1. Gunther Schnabl, 2012. "Die japanischen Lehren für die europäische Krise," Global Financial Markets Working Paper Series 2012-36, Friedrich-Schiller-University Jena.
  2. Schnabl, Gunther, 2013. "The global move into the zero interest rate and high debt trap," Working Papers 121, University of Leipzig, Faculty of Economics and Management Science.

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