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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. 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.
    2. 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.
    3. Olivier J. Blanchard, 2016. "The US Phillips Curve: Back to the 60s?," Policy Briefs PB16-1, Peterson Institute for International Economics.
    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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