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Persistent macroeconomic imbalances in the Euro area: causes and consequences

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  • Nils Holinski
  • Clemens J. M. Kool
  • Joan Muysken

Abstract

In this paper, the authors document a growing divergence between current account imbalances in northern and southern euro area countries from 1992 to 2007. The imbalance occurred without a concomitant rise in productivity and growth in the southern (deficit) countries. The authors argue that systematic monitoring of external imbalances and implementation of better coordinated policies to prevent the emergence of unsustainably large imbalances in the euro area is advisable because (i) country heterogeneity and the absence of optimal currency area characteristics may lead to the emergence of large cur- rent account imbalances without automatic gains in productivity and economic growth to sustain these imbalances, (ii) the absence of sufficient market-based adjustment mechanisms substantially increases the costs of ultimate adjustment toward more sustainable current account positions, and (iii) large external imbalances—particularly through the major role of the banking system—potentially have strong negative consequences for fiscal policy.

Suggested Citation

  • Nils Holinski & Clemens J. M. Kool & Joan Muysken, 2012. "Persistent macroeconomic imbalances in the Euro area: causes and consequences," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 1-20.
  • Handle: RePEc:fip:fedlrv:y:2012:i:jan:p:1-20:n:v.94no.1
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    References listed on IDEAS

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    1. Anders Aslund & Marek Dabrowski, 2008. "Challenges of Globalization: Imbalances and Growth," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 4181.
    2. Michael G. Arghyrou & Georgios Chortareas, 2008. "Current Account Imbalances and Real Exchange Rates in the Euro Area," Review of International Economics, Wiley Blackwell, vol. 16(4), pages 747-764, September.
    3. Chuck C Y Kwok & Solomon Tadesse, 2006. "National culture and financial systems," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 37(2), pages 227-247, March.
    4. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-329, June.
    5. Florence Jaumotte & Piyaporn Sodsriwiboon, 2010. "Current Account Imbalances in the Southern Euro Area," IMF Working Papers 10/139, International Monetary Fund.
    6. Philip R. Lane & Gian Maria Milesi-Ferretti, 2007. "A Global Perspective on External Positions," NBER Chapters,in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 67-102 National Bureau of Economic Research, Inc.
    7. Holinski Nils & Kool Clemens & Muysken Joan, 2009. "International Portfolio Balance – Modeling the External Adjustment Process," Research Memorandum 033, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
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