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Euro area macroeconomic imbalances and their asymmetric reversal: the link between financial integration and income inequality

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  • Benedicta Marzinotto

    () (University of Udine
    College of Europe)

Abstract

Abstract This paper explores the impact of the Economic and Monetary Union (EMU) and the ensuing financial integration on Euro Area (EA) macroeconomic imbalances. It is found that EMU caused an exceptional deterioration of current account positions in relatively unequal EA countries more than in the others. The explanation provided is that the large increase in money supply following the abolition of capital controls in 1990, of exchange rate risks in 1999 and the parallel softening of domestic credit market regulation throughout the 1990s that lead to downwards interest rate convergence had the effect of relaxing collateral constraints specifically for lower-income households, whose share is found to rise with levels of income inequality. Optimistic expectations about future income led to over-borrowing by these groups. Consequently, current account reversal was asymmetric because the crisis forced indebted lower-income (unskilled) households to abruptly reduce consumption, as they were the first to be pulled out of the labour market and hardly had financial buffers. The hypothesis is tested using a difference-in-difference approach to panel data.

Suggested Citation

  • Benedicta Marzinotto, 2017. "Euro area macroeconomic imbalances and their asymmetric reversal: the link between financial integration and income inequality," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 34(1), pages 83-104, April.
  • Handle: RePEc:spr:epolit:v:34:y:2017:i:1:d:10.1007_s40888-017-0054-6
    DOI: 10.1007/s40888-017-0054-6
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    More about this item

    Keywords

    Current account; Income inequality; Financial liberalization; Debt leverage; Difference-in-difference;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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