IDEAS home Printed from https://ideas.repec.org/p/euf/ecopap/0375.html

External rebalancing is not just an exporters' story: real exchange rates, the non-tradable sector and the euro

Author

Listed:
  • Eric Ruscher
  • Guntram B. Wolff

Abstract

Global and European trade balances have seen strong divergences combined with strong movements in the exchange rate. Trade balances and real effective exchange rates are related. Using different measures of the real effective exchange rate, we show that this long-run link hinges on the relative price of non-tradable to tradable goods and services in relation to their trading partners. An improvement in the trade balance is associated with a fall in the relative price of non-tradable goods and services. The elimination of nominal exchange rates with the euro does not change these relationships. Government consumption increases the relative price of non-tradable goods. The results highlight the importance of internal price adjustments for external balances, a point frequently overlooked in policy debates.

Suggested Citation

  • Eric Ruscher & Guntram B. Wolff, 2009. "External rebalancing is not just an exporters' story: real exchange rates, the non-tradable sector and the euro," European Economy - Economic Papers 2008 - 2015 375, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    • Handle: RePEc:euf:ecopap:0375
    as

    Download full text from publisher

    File URL: https://ec.europa.eu/economy_finance/publications/pages/publication14656_en.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Angelini, E. & Dieppe, A. & Pierluigi, B., 2015. "Modelling internal devaluation experiences in Europe: Rational or learning agents?," Journal of Macroeconomics, Elsevier, vol. 43(C), pages 81-92.
    2. Friesenbichler, Klaus S. & Glocker, Christian, 2019. "Tradability and productivity growth differentials across EU Member States," Structural Change and Economic Dynamics, Elsevier, vol. 50(C), pages 1-13.
    3. Angelini, Elena & Dieppe, Alistair & Pierluigi, Beatrice, 2013. "Learning about wage and price mark-ups in euro area countries," Working Paper Series 1512, European Central Bank.
    4. Auboin, Marc & Ruta, Michel, 2011. "The relationship between exchange rates and International Trade: A review of economic literature," WTO Staff Working Papers ERSD-2011-17, World Trade Organization (WTO), Economic Research and Statistics Division.
    5. Tony Cavoli & Sasidaran Gopalan & Ramkishen S. Rajan, 2021. "Do macroprudential policies counter real exchange rate appreciation in emerging markets?," The World Economy, Wiley Blackwell, vol. 44(7), pages 2164-2187, July.
    6. Simiso Msomi & Paul-Francios Muzindutsi, 2025. "Exchange Rates, Supply Chain Activity/Disruption Effects, and Exports," Forecasting, MDPI, vol. 7(1), pages 1-14, February.
    7. Michael Fidora & Claire Giordano & Martin Schmitz, 2021. "Real Exchange Rate Misalignments in the Euro Area," Open Economies Review, Springer, vol. 32(1), pages 71-107, February.
    8. Ángel Estrada & Jordi Galí & David López-Salido, 2013. "Patterns of Convergence and Divergence in the Euro Area," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(4), pages 601-630, December.
    9. Mariarosaria Comunale & Jeroen Hessel, 2014. "Current account imbalances in the Euro area: Competitiveness or financial cycle?," DNB Working Papers 443, Netherlands Central Bank, Research Department.
    10. Tunaer Vural, Burçak Müge, 2019. "Determinants of Turkish real effective exchange rates," The Quarterly Review of Economics and Finance, Elsevier, vol. 73(C), pages 151-158.
    11. Klaus Regling & Servaas Deroose & Reinhard Felke & Paul Kutos, 2010. "The Euro After Its First Decade : Weathering the Financial Storm and Enlarging the Euro Area," Governance Working Papers 22817, East Asian Bureau of Economic Research.
    12. Lan Huong Hoang, 2016. "The Role of Exchange Rate in Supporting Trade Balance in Vietnam," IHEID Working Papers 16-2016, Economics Section, The Graduate Institute of International Studies.
    13. van Treeck, Till. & Sturn, Simon., 2012. "Income inequality as a cause of the Great Recession? : A survey of current debates," ILO Working Papers 994709343402676, International Labour Organization.
    14. Mariarosaria Comunale, 2019. "Long‐run determinants and misalignments of the real effective exchange rate in the EU," Scottish Journal of Political Economy, Scottish Economic Society, vol. 66(5), pages 649-672, November.
    15. Klaus Regling & Servaas Deroose & Reinhard Felke & Paul Kutos, 2010. "The Euro After Its First Decade: Weathering the Financial Storm and Enlarging the Euro Area," ADBI Working Papers 205, Asian Development Bank Institute.
    16. Roman Stöllinger, 2020. "Tradability of output and the current account in Europe," International Economics and Economic Policy, Springer, vol. 17(1), pages 167-218, February.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • 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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:euf:ecopap:0375. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ECFIN INFO (email available below). General contact details of provider: https://edirc.repec.org/data/dg2ecbe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.