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Financial Integration and EMU's External Imbalances in a Two-Country OLG Model

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  • Karl Farmer

    ()

    (Karl-Franzens University of Graz)

Abstract

The pronounced increase in external imbalances in the European Economic and Monetary Union (EMU) during the years running up to 2008 is traditionally explained by financial integration through the common currency. This paper examines in a one-good, two-country overlapping generations' model, with production, capital accumulation and public debt, the effects of financial integration on the net foreign asset positions of initially low-interest and high-interest rate EMU countries. We find that a lower savings rate and government expenditure quota, together with a higher capital production share in the latter can in fact be transformed into the observed external imbalances when interest rates converge.

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File URL: http://www-classic.uni-graz.at/vwlwww/forschung/RePEc/wpaper/2013-07.pdf
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Paper provided by University of Graz, Department of Economics in its series Graz Economics Papers with number 2013-07.

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Date of creation: Jul 2013
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Handle: RePEc:grz:wpaper:2013-07
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Find related papers by JEL classification:
  • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
  • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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  1. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g7287gghh is not listed on IDEAS
  2. Coeurdacier, Nicolas & Martin, Philippe, 2007. "The geography of asset trade and the euro: insiders and outsiders," CEPREMAP Working Papers (Docweb) 0701, CEPREMAP.
  3. Philip R. Lane, 2012. "The European Sovereign Debt Crisis," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 49-68, Summer.
  4. Karl Farmer, 2014. "Financial Integration and EMU’s External Imbalances in a Two-Country OLG Model," International Advances in Economic Research, International Atlantic Economic Society, vol. 20(1), pages 1-21, February.
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  8. Lane, Philip R. & Pels, Barbara, 2012. "Current Account Imbalances in Europe," CEPR Discussion Papers 8958, C.E.P.R. Discussion Papers.
  9. Buiter, Willem H, 1981. "Time Preference and International Lending and Borrowing in an Overlapping-Generations Model," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 769-97, August.
  10. Roger E.A. Farmer, 2009. "Confidence, Crashes and Animal Spirits," NBER Working Papers 14846, National Bureau of Economic Research, Inc.
  11. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April.
  12. Gian-Maria Milesi-Ferretti & Philip R. Lane, 2010. "The Cross-Country Incidence of the Global Crisis," IMF Working Papers 10/171, International Monetary Fund.
  13. Francesco Caselli, 2007. "The Marginal Product of Capital," The Quarterly Journal of Economics, MIT Press, vol. 122(2), pages 535-568, 05.
  14. Kalemli-Ozcan, Sebnem & Papaioannou, Elias & Peydró, José-Luis, 2010. "What lies beneath the euro's effect on financial integration? Currency risk, legal harmonization, or trade?," Journal of International Economics, Elsevier, vol. 81(1), pages 75-88, May.
  15. Philip R. Lane, 2006. "The Real Effects of European Monetary Union," Journal of Economic Perspectives, American Economic Association, vol. 20(4), pages 47-66, Fall.
  16. BAI, Chong-En & QIAN, Zhenjie, 2010. "The factor income distribution in China: 1978-2007," China Economic Review, Elsevier, vol. 21(4), pages 650-670, December.
  17. Jappelli, Tullio & Pagano, Marco, 1992. "Saving, Growth and Liquidity Constraints," CEPR Discussion Papers 662, C.E.P.R. Discussion Papers.
  18. Vasco Carvalho & Alberto Martin & Jaume Ventura, 2012. "Understanding bubbly episodes," Economics Working Papers 1301, Department of Economics and Business, Universitat Pompeu Fabra.
  19. Fagan, Gabriel & Gaspar, Vítor, 2008. "Macroeconomic adjustment to monetary union," Working Paper Series 0946, European Central Bank.
  20. repec:spo:wpmain:info:hdl:2441/c8dmi8nm4pdjkuc9g7287gghh is not listed on IDEAS
  21. Karl Farmer, 2006. "Reducing Public Debt under Dynamic Efficiency: Transitional Dynamics in Diamond's OLG Model," Atlantic Economic Journal, International Atlantic Economic Society, vol. 34(2), pages 195-208, June.
  22. Rankin, Neil, 1987. "Disequilibrium and the Welfare-Maximising Levels of Government Spending, Taxation and Debt," Economic Journal, Royal Economic Society, vol. 97(385), pages 65-85, March.
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Cited by:

  1. Karl Farmer, 2014. "Financial Integration and EMU’s External Imbalances in a Two-Country OLG Model," International Advances in Economic Research, International Atlantic Economic Society, vol. 20(1), pages 1-21, February.
  2. Karl Farmer & Irina Ban, 2014. "Modeling financial integration, intra-EMU and Asian-US external imbalances," Graz Economics Papers 2014-06, University of Graz, Department of Economics.

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