Current Account Adjustment in the Euro-Zone: Lessons from a Flexible-Price-Model
This paper deals the ongoing current account adjustment process in the southern Euro - area countries. It applies an extended version of the Obstfeld/Rogoff (2005) model to Euro-Zone- imbalances and provides an interpretation of the results. I develop a five-region-version of the model, consisting of a EMU – deficit (GIPS)- and a EMU – surplus region besides the United States, Asia and OPEC. The model also allows for changes in the relative size of the tradable- to the non- tradable sector, induced by changes in the relative prices of tradable- to non-tradable goods. The paper shows the approximated sizes and the directions of price movements, which are implied by the current account adjustment process that started in the GIPS countries after the financial crisis. It argues, that declines in output and employment during the adjustment process follow intuitively from the model results. These output losses result from sticky prices in combination with a limited nominal depreciation of the common currency and the importance of intra-EMU adjustment. The paper further shows that supply-side changes, global rebalancing issues and the time horizon of the rebalancing process have an important impact on the size of the price movements. Despite the discussed weaknesses of the model, the analysis clearly suggests unfinished real effective exchange rate adjustment in Greece, Spain and Portugal implying further negative economic consequences on these economies by the rebalancing process. Italy might be an exception.
|Date of creation:||Aug 2013|
|Contact details of provider:|| Postal: University of Graz, Universitaetsstr. 15/F4, 8010 Graz, Austria|
Phone: ++43 316 380-3440
Fax: ++43 316 380-9520, 9521
Web page: http://volkswirtschaftslehre.uni-graz.at/
More information through EDIRC
|Order Information:||Web: http://www100.uni-graz.at/vwlwww/forschung/RePEc/|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Silvia Merler & Jean Pisani-Ferry, 2012.
"Sudden Stops in the Euro Area,"
Review of Economics and Institutions,
Università di Perugia, vol. 3(3).
- Silvia Merler & Jean Pisani-Ferry, 2012. "Sudden stops in the euro area," Policy Contributions 718, Bruegel.
- Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2012. "External adjustment and the global crisis," Journal of International Economics, Elsevier, vol. 88(2), pages 252-265.
- Philip R. Lane & Gian Maria Milesi-Ferretti, 2011. "External Adjustment and the Global Crisis," NBER Chapters,in: Global Financial Crisis National Bureau of Economic Research, Inc.
- Gian Maria Milesi-Ferretti & Philip Lane, 2011. "External Adjustment and the Global Crisis," The Institute for International Integration Studies Discussion Paper Series iiisdp369, IIIS.
- Gian M Milesi-Ferretti & Philip R. Lane, 2011. "External Adjustment and the Global Crisis," IMF Working Papers 11/197, International Monetary Fund.
- Philip R. Lane & Gian Maria Milesi Ferretti, 2011. "External Adjustment and the Global Crisis," NBER Working Papers 17352, National Bureau of Economic Research, Inc.
- Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2011. "External Adjustment and the Global Crisis," CEPR Discussion Papers 8546, C.E.P.R. Discussion Papers.
- Andrea Ferrero & Mark Gertler & Lars E. O. Svensson, 2007. "Current Account Dynamics and Monetary Policy," NBER Chapters,in: International Dimensions of Monetary Policy, pages 199-244 National Bureau of Economic Research, Inc.
- Mark Gertler & Lars Svensson & Andrea Ferrero, 2008. "Current Account Dynamics and Monetary Policy," 2008 Meeting Papers 359, Society for Economic Dynamics.
- Andrea Ferrero & Mark Gertler & Lars E.O. Svensson, 2008. "Current Account Dynamics and Monetary Policy," NBER Working Papers 13906, National Bureau of Economic Research, Inc.
- Andrea Ferrero & Mark Gertler & Lars E. O. Svensson, 2008. "Current account dynamics and monetary policy," Working Paper Series 2008-26, Federal Reserve Bank of San Francisco.
- Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, July.
- Engler, Philipp, 2009. "Global rebalancing in a three-country model," Discussion Papers 2009/1, Free University Berlin, School of Business & Economics.
- Bergin, Paul R., 2006. "How well can the New Open Economy Macroeconomics explain the exchange rate and current account?," Journal of International Money and Finance, Elsevier, vol. 25(5), pages 675-701, August.
- Paul R. Bergin, 2004. "How Well Can the New Open Economy Macroeconomics Explain the Exchange Rate and Current Account?," NBER Working Papers 10356, National Bureau of Economic Research, Inc.
- Maurice Obstfeld & Kenneth S. Rogoff, 2005. "Global Current Account Imbalances and Exchange Rate Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(1), pages 67-146.
- Kenneth Rogoff & William Brainard & George Perry, "undated". "Global Current Account Imbalances and Exchange Rate Adjustments," Working Paper 33687, Harvard University OpenScholar.
- Ruo Chen & Gian M Milesi-Ferretti & Thierry Tressel, 2012. "External Imbalances in the Euro Area," IMF Working Papers 12/236, International Monetary Fund.
- Przemyslaw Kowalski & Molly Lesher, 2011. "Global Imbalances: Trade Effects and Policy Challenges," OECD Trade Policy Papers 120, OECD Publishing.
- Jarkko Turunen & Richard T. Harmsen & Tamim Bayoumi, 2011. "Euro Area Export Performance and Competitiveness," IMF Working Papers 11/140, International Monetary Fund.
- Philipp Engler & Michael Fidora & Christian Thimann, 2009. "External Imbalances and the US Current Account: How Supply-Side Changes Affect an Exchange Rate Adjustment ," Review of International Economics, Wiley Blackwell, vol. 17(5), pages 927-941, November.
- Thimann, Christian & Fidora, Michael & Engler, Philipp, 2007. "External imbalances and the US current account: how supply-side changes affect an exchange rate adjustment," Working Paper Series 761, European Central Bank.
- Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:grz:wpaper:2013-08. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael Scholz)
If references are entirely missing, you can add them using this form.