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Structural reforms and external rebalancing in the euro area: a model-based analysis

Listed author(s):
  • Lukas Vogel

Economic research paper on EMU and open economy macroeconomics The paper uses a 3-region version (small open economy in EMU, other euro area, rest of the world) of QUEST to assess the impact of structural reforms on external positions along two dimensions, namely the impact of flexibility and prudence on the prevention of imbalances and the contribution of structural reforms to their correction. With regard to imbalance prevention, the impact of nominal price/wage flexibility above current levels on the reaction of external positions to bubble/demand shocks is modest and case-dependent; prudent collateral valuation mitigates overborrowing risks. Product market reform, wage moderation and fiscal consolidation can support/accelerate the correction of imbalances as they increase price competitiveness and improve trade/current account balances in the short and medium term (here, up to 5-6 years). Lasting structural reforms bring permanent trade competitiveness gains. The initial improvement of external balances narrows in the long run, however, because growth-enhancing reforms also raise import demand when income rises in the longer term. EMU-wide reforms affect balances with the rest of the world, but do not reduce disparities between EMU member states.

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Paper provided by Directorate General Economic and Financial Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers 2008 - 2015 with number 443.

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Length: 52 pages
Date of creation: Jul 2011
Handle: RePEc:euf:ecopap:0443
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