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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.

Suggested Citation

  • Karl Farmer, 2013. "Financial Integration and EMU's External Imbalances in a Two-Country OLG Model," Graz Economics Papers 2013-07, University of Graz, Department of Economics.
  • Handle: RePEc:grz:wpaper:2013-07
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    References listed on IDEAS

    as
    1. 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.
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    6. Roger E. A. Farmer, 2012. "Confidence, Crashes and Animal Spirits," Economic Journal, Royal Economic Society, vol. 122(559), pages 155-172, March.
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    13. repec:spo:wpmain:info:hdl:2441/c8dmi8nm4pdjkuc9g7287gghh is not listed on IDEAS
    14. Karl Farmer, 2006. "Reducing Public Debt under Dynamic Efficiency: Transitional Dynamics in Diamond's OLG Model," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 34(2), pages 195-208, June.
    15. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
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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, Springer;International Atlantic Economic Society, vol. 20(1), pages 1-21, February.
    2. Karl Farmer & Bogdan Mihaiescu, 2016. "Credit constraints and differential growth in equilibrium modeling of EMU and global trade imbalances," Graz Economics Papers 2016-05, University of Graz, Department of Economics.
    3. Karl Farmer & Bogdan Mihaiescu, 2015. "Pension systems and financial constraints in a three-country OLG model of intra-EMU and global trade imbalances," Graz Economics Papers 2015-08, University of Graz, Department of Economics.
    4. repec:kap:iaecre:v:20:y:2014:i:1:p:1-21 is not listed on IDEAS
    5. 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.
    6. repec:kap:iaecre:v:23:y:2017:i:3:d:10.1007_s11294-017-9638-8 is not listed on IDEAS
    7. Karl Farmer, 2016. "The Intertemporal Equilibrium Modeling of Intra-EMU and Global Trade Imbalances," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 22(4), pages 377-395, November.

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