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Current account imbalances and systemic risk within a monetary union

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  • Angelini, Elisabetta Croci
  • Farina, Francesco

Abstract

The aim of this paper is to cast light on possible influences of current account imbalances on the escalation of systemic risk which hit the Eurozone. The hypothesis, which was set up by examining empirical evidence, points to heterogeneity across the macroeconomic conditions prevailing in different clusters of EMU countries. Given the strengthened financial and real interconnections across the EMU countries, the capital flows triggered by widening distances between surplus and deficit trade balances, and also between sound and deteriorating public budgets, represent an important factor magnifying systemic risk and contagion. The econometric estimates we conducted concern two sub-periods, the two decades from the launch of the EMS in 1979 to 1999, and the first twelve years (1999–2010) of the monetary union. The findings sound as a confirmation that the strengthened financial and real interconnections across the EMU countries, instead of facilitating convergence among the Core and the Peripheral economies, have magnified and mutually reinforced imbalances. The divide between surplus and deficit countries – the backward EMU countries running larger current account deficits, and the more advanced countries accumulating larger current account surpluses – have brought about increasing capital outflows from the Periphery to pay for excess imports from the Core. Conversely, increasing capital flows were invested by the banks of the Core countries in the Periphery's public bonds.

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  • Angelini, Elisabetta Croci & Farina, Francesco, 2012. "Current account imbalances and systemic risk within a monetary union," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 647-656.
  • Handle: RePEc:eee:jeborg:v:83:y:2012:i:3:p:647-656
    DOI: 10.1016/j.jebo.2012.05.009
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    Cited by:

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    2. Javier Ordóñez & Hector Sala & José Silva, 2015. "Real unit labour costs in Eurozone countries: drivers and clusters," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 4(1), pages 1-19, December.
    3. Benoit Dicharry & Lubica Stiblarova, 2023. "Positive externalities of the EU cohesion policy: Toward more synchronised CEE countries?," International Economics and Economic Policy, Springer, vol. 20(3), pages 485-508, July.
    4. Elisabetta Croci Angelini & Francesco Farina & Enzo Valentini, 2016. "Contagion across Eurozone’s sovereign spreads and the Core-Periphery divide," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 43(1), pages 197-213, February.
    5. Collignon, Stefan & Esposito, Piero, 2021. "Macroeconomic imbalances in Europe: How to overcome the fallacy of unit labour costs," Journal of Policy Modeling, Elsevier, vol. 43(3), pages 673-691.
    6. Ronny Mazzocchi & Roberto Tamborini, 2019. "Current Account Imbalances and the Euro Area: Alternative Views," EconPol Working Paper 27, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    7. Esposito, Piero, 2017. "Trade creation, trade diversion and imbalances in the EMU," Economic Modelling, Elsevier, vol. 60(C), pages 462-472.
    8. Juan C. Cuestas & Mercedes Monfort & Javier Ordóñez, 2021. "Stochastic convergence in real personal disposable income in the EU: A note," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 6390-6394, October.
    9. Esposito, Piero, 2015. "Trade (dis)Integration and Imbalances in the EMU," LEAP Working Papers 2015/7, Luiss Institute for European Analysis and Policy.
    10. Roberto Tamborini, 2018. "Macroeconomic Imbalances and the Euro Zone. Alternative Views," EconPol Working Paper 14, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    11. Juan Ángel Lafuente & Amparo Marco & Mercedes Monfort & Javier Ordóñez, 2020. "Social Exclusion and Convergence in the EU: An Assessment of the Europe 2020 Strategy," Sustainability, MDPI, vol. 12(5), pages 1-22, February.
    12. Ronny Mazzocchi & Roberto Tamborini, 2021. "Current account imbalances and the Euro Area. Controversies and policy lessons," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 38(1), pages 203-234, April.
    13. Eleonora Cutrini and Giorgio Galeazzi, 2014. "Contagion in the Euro crisis: capital flows and trade linkages," Working Papers 44-2014, Macerata University, Department of Studies on Economic Development (DiSSE), revised Nov 2014.
    14. Esposito, Piero & Messori, Marcello, 2019. "Competitive or recession gains? On the recent macroeconomic rebalances in the EMU," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 147-167.
    15. Radosevic, Dubravko, 2016. "Financial Markets and Debt Crisis in European Union: Preventing spillover effects of financial crisis between EU periphery and the eurozone," MPRA Paper 78613, University Library of Munich, Germany, revised 03 Mar 2017.
    16. Roberto Tamborini, 2017. "Europe at the Interdependence War," EconPol Working Paper 2, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.

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    More about this item

    Keywords

    Current account imbalances; Systemic risk; European Monetary Union;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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