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Some Unpleasant Euro Arithmetic

Author

Listed:
  • Guillaume Gaulier
  • Vincent Vicard

Abstract

Current estimates of misalignments in real effective exchange rates show that euro area imbalances are still large: Germany exhibits a 20 percentage point undervaluation compared to the rest of the euro area (EA). Within a monetary union, rebalancing requires price adjustments through differentials in inflation rates. The rebalancing process therefore involves a 2 percentage point higher inflation in Germany than in the rest of the EA over a decade, or a 1 pp over two decades. It also requires above 2% inflation in surplus countries to meet the 2% ECB inflation target. At the current pace, rebalancing is a 20 year process and requires sustained very low inflation rates in the rest of the euro area.

Suggested Citation

  • Guillaume Gaulier & Vincent Vicard, 2018. "Some Unpleasant Euro Arithmetic," CEPII Policy Brief 2018-21, CEPII research center.
  • Handle: RePEc:cii:cepipb:2018-21
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    File URL: http://www.cepii.fr/PDF_PUB/pb/2018/pb2018-21.pdf
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    References listed on IDEAS

    as
    1. Cécile Couharde & Anne-Laure Delatte & Carl Grekou & Valérie Mignon & Florian Morvillier, 2017. "Sur- et sous-évaluations de change en zone euro?: vers une correction soutenable des déséquilibres??," La Lettre du CEPII, CEPII research center, issue 375.
    2. Olivier J. Blanchard, 2016. "The US Phillips Curve: Back to the 60s?," Policy Briefs PB16-1, Peterson Institute for International Economics.
    3. Moral-Benito, Enrique & Viani, Francesca, 2017. "An anatomy of the Spanish current account adjustment: the role of permanent and transitory factors," MPRA Paper 80079, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Current account imbalances; Euro area; Exchange rates misalignments;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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