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Heterogeneity within the Euro Area: New Insights into an Old Story

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  • Virginie Coudert
  • Cécile Couharde
  • Carl Grekou
  • Valérie Mignon

Abstract

We assess cross-country heterogeneity within the eurozone and its evolution over time by measuring the distances between the equilibrium exchange rates’ paths of member countries. These equilibrium paths are derived from the minimization of currency misalignments, by matching real exchange rates with their economic fundamentals. Using cluster and factor analyses, we identify two distinct groups of countries in the run-up to the European Monetary Union (EMU), Greece being clearly an outlier at that time. Comparing the results with more recent periods, we find evidence of rising dissimilarities between these two sets of countries, as well as within the groups themselves. Overall, our findings illustrate the building-up of macroeconomic imbalances within the eurozone before the 2008 crisis and the fragmentation between its member countries that followed.

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  • Virginie Coudert & Cécile Couharde & Carl Grekou & Valérie Mignon, 2019. "Heterogeneity within the Euro Area: New Insights into an Old Story," Working Papers 2019-05, CEPII research center.
  • Handle: RePEc:cii:cepidt:2019-05
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    Cited by:

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    2. Coudert, Virginie & Couharde, Cécile & Grekou, Carl & Mignon, Valérie, 2020. "Heterogeneity within the euro area: New insights into an old story," Economic Modelling, Elsevier, vol. 90(C), pages 428-444.
    3. Claire Giordano, 2019. "How frequent a BEER? Assessing the impact of data frequency on real exchange rate misalignment estimation," Questioni di Economia e Finanza (Occasional Papers) 522, Bank of Italy, Economic Research and International Relations Area.
    4. Carlo Klein, 2021. "The Never-Ending Quest for the European Fiscal Policy’s Objectives: Stability vs. Convergence or Stability and Convergence?," Athens Journal of Business & Economics, Athens Institute for Education and Research (ATINER), vol. 7(1), pages 41-66, January.

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    More about this item

    Keywords

    Euro Area; Equilibrium Exchange Rates; Cluster Analysis; Factor Analysis; Macroeconomic Imbalances;
    All these keywords.

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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