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External debt and real exchange rates’adjustment in the euro area: New evidence from a nonlinear NATREX model

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  • Cécile Couharde
  • Serge Rey
  • Audrey Sallenave

Abstract

In this paper, we revisit medium- to long-run real exchange rate determination within the euro area, focusing on the role of external debt. Accordingly, we rely on the NATREX approach which provides an explicit framework of the external debt-real exchange rates nexus. In particular, given the indebtedness levels reached by the euro area economies, we investigate potential nonlinearity in real exchange rates dynamics, according to the level of the external debt. Our results evidence that during the monetary union, gross and net external debt positions of the euro area countries have exerted pressures on real exchange rate dynamics within the area. Moreover, we find that, beyond a threshold reached by the external debt, euro area countries are found to be in a vulnerable position, leading to an unavoidable adjustment process. Nevertheless,the adjustment process, while effective, is found to be low and occurs slowly.

Suggested Citation

  • Cécile Couharde & Serge Rey & Audrey Sallenave, 2015. "External debt and real exchange rates’adjustment in the euro area: New evidence from a nonlinear NATREX model," EconomiX Working Papers 2015-20, University of Paris Nanterre, EconomiX.
  • Handle: RePEc:drm:wpaper:2015-20
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    References listed on IDEAS

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    Cited by:

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    2. Alberto Bagnai & Christian Alexander Mongeau Ospina, 2018. "Monetary integration vs. real disintegration: single currency and productivity divergence in the euro area," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 21(4), pages 353-367, October.
    3. Taoufik Bouraoui, 2019. "External debts, current account balance and exchange rates in emerging countries," Economics Bulletin, AccessEcon, vol. 39(4), pages 2333-2342.

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    More about this item

    Keywords

    Euro area; External debt; NATREX approach; Panel Smooth Transition Regression models; Real exchange rates.;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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