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Persistent macroeconomic imbalances in the Euro area: causes and consequences

  • Nils Holinski
  • Clemens Kool
  • Joan Muysken

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.

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Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2012)
Issue (Month): Jan ()
Pages: 1-20

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Handle: RePEc:fip:fedlrv:y:2012:i:jan:p:1-20:n:v.94no.1
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  1. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  2. Philip Lane & Gian Maria Milesi-Ferreti, 2005. "A Global Perspective on External Positions," Trinity Economics Papers tep16, Trinity College Dublin, Department of Economics.
  3. Arghyrou, Michael G & Chortareas, Georgios, 2006. "Current Account Imbalances and Real Exchange Rates in the Euro Area," Cardiff Economics Working Papers E2006/23, Cardiff University, Cardiff Business School, Economics Section.
  4. Solomon Tadesse & Chuck Kwok, 2005. "National Culture and Financial Systems," William Davidson Institute Working Papers Series wp884, William Davidson Institute at the University of Michigan.
  5. Florence Jaumotte & Piyaporn Sodsriwiboon, 2010. "Current Account Imbalances in the Southern Euro Area," IMF Working Papers 10/139, International Monetary Fund.
  6. Anders Aslund & Marek Dabrowski, 2008. "Challenges of Globalization: Imbalances and Growth," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 4181.
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