Exchange Rate Misalignments, Fiscal Federalism and Redistribution: How to Adjust in a Monetary Union
The euro zone crisis illustrates the insufficiency of adjustment mechanisms in a monetary union characterized by a large heterogeneity. Exchange rate adjustments being impossible, they are very few alternative mechanisms. This situation reflects a simple diagnosis. At the level of the whole euro zone, the euro is close to its equilibrium parity. But the euro is strongly overvalued for Southern European countries, France included, and largely undervalued for Northern European countries, especially Germany. In a first step, the paper gives an evaluation of these exchange rate misalignments inside the euro zone, using a FEER approach. Using panel econometric techniques over the period 1994-2011, we confirm that the exchange rate misalignments in the euro zone have diverged, reflecting unsustainable evolutions. Last, we give an estimation of the equivalent transfers in % of GDP implied by these misalignments in the different European countries. In a second step, we use a 'stock-flow consistent' model of a monetary union with two countries along the lines of Godley and Lavoie (2007) and Duwicquet and Mazier (2010). A federal budget is introduced with federal expenditures and social transfers financed by federal taxes and euro-bonds issuing. Three results are obtained. The stabilizing role of such a federal budget is confirmed facing asymmetric shock or the negative impact of exchange rate misalignments inside the monetary union. Without such a federal mechanism the overvaluation of the Southern currency (Greek or Spanish euro), facing the undervaluation of the Northern currency (German euro), induces a strong slowdown in the South and a cumulative imbalances within the monetary union. Similarly, the stabilizing role of euro-bonds used to finance European investment projects is illustrated. Their role in the pooling of national debts would be the last point to examine.
|Date of creation:||08 Jun 2012|
|Date of revision:|
|Publication status:||Published in 9th Euroframe Conference on Economic Policy Issues in the European Union, Jun 2012, Kiel, Germany|
|Note:||View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00848886|
|Contact details of provider:|| Web page: https://hal.archives-ouvertes.fr/|
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.:
- M. Hashem Pesaran, 2007.
"A simple panel unit root test in the presence of cross-section dependence,"
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 22(2), pages 265-312.
- Pesaran, M.H., 2003. "A Simple Panel Unit Root Test in the Presence of Cross Section Dependence," Cambridge Working Papers in Economics 0346, Faculty of Economics, University of Cambridge.
- William R. Cline & John Williamson, 2011. "The Current Currency Situation," Policy Briefs PB11-18, Peterson Institute for International Economics.
- Jamel Saadaoui, 2011.
"Exchange Rate Dynamics and Fundamental Equilibrium Exchange Rates,"
AccessEcon, vol. 31(3), pages 1993-2005.
- Jamel Saadaoui, 2011. "Exchange Rate Dynamics and Fundamental Equilibrium Exchange Rates," Post-Print halshs-00593674, HAL.
- Pierfederico Asdrubali & Soyoung Kim, 2000.
"Dynamic Risk Sharing in the United States and Europe,"
Econometric Society World Congress 2000 Contributed Papers
1621, Econometric Society.
- Asdrubali, Pierfederico & Kim, Soyoung, 2004. "Dynamic risksharing in the United States and Europe," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 809-836, May.
- Virginie Coudert & Cécile Couharde & Valérie Mignon, 2013.
"On Currency Misalignments within the Euro Area,"
Review of International Economics,
Wiley Blackwell, vol. 21(1), pages 35-48, 02.
- Virginie Coudert & Cécile Couharde & Valérie Mignon, 2012. "On currency misalignments within the euro area," Working Papers 2012-07, CEPII research center.
- Virginie Coudert & Cécile Couharde & Valérie Mignon, 2012. "On currency misalignments within the euro area," EconomiX Working Papers 2012-30, University of Paris West - Nanterre la Défense, EconomiX.
- John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17.
- Micka�l Clevenot & Yann Guy & Jacques Mazier, 2010. "Investment and the rate of profit in a financial context: the French case," International Review of Applied Economics, Taylor & Francis Journals, vol. 24(6), pages 693-714.
- Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002.
"Unit root tests in panel data: asymptotic and finite-sample properties,"
Journal of Econometrics,
Elsevier, vol. 108(1), pages 1-24, May.
- Tom Doan, . "LEVINLIN: RATS procedure to perform Levin-Lin-Chu test for unit roots in panel data," Statistical Software Components RTS00242, Boston College Department of Economics.
- Peter Pedroni, 1999.
"Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors,"
Department of Economics Working Papers
2000-02, Department of Economics, Williams College.
- Pedroni, Peter, 1999. " Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 653-70, Special I.
- Damiaan Persyn & Joakim Westerlund, 2008. "Error-correction–based cointegration tests for panel data," Stata Journal, StataCorp LP, vol. 8(2), pages 232-241, June.
- Cécile Couharde & Didier Borowski, 2003.
"The Exchange Rate Macroeconomic Balance Approach: New Methodology and Results for the Euro, the Dollar, the Yen and the Pound sterling,"
- Didier Borowski & Cecile Couharde, 2003. "The Exchange Rate Macroeconomic Balance Approach: New Methodology and Results for the Euro, the Dollar, the Yen and the Pound Sterling," Open Economies Review, Springer, vol. 14(2), pages 169-190, April.
- repec:cii:cepiei:2010-1tb is not listed on IDEAS
- Godley, Wynne, 1999. "Money and Credit in a Keynesian Model of Income Determination," Cambridge Journal of Economics, Oxford University Press, vol. 23(4), pages 393-411, July.
- Westerlund, Joakim, 2005.
"Testing for Error Correction in Panel Data,"
2005:11, Lund University, Department of Economics.
- Se-Eun Jeong & Jacques Mazier & Jamel Saadaoui, 2010. "Exchange Rate Misalignments at World and European Levels: a FEER Approach," Post-Print halshs-00435836, HAL.
- Ansgar Belke & Christian Dreger, 2011.
"Current Account Imbalances in the Euro Area: Catching up or Competitiveness?,"
Discussion Papers of DIW Berlin
1106, DIW Berlin, German Institute for Economic Research.
- Belke, Ansgar & Dreger, Christian, 2011. "Current Account Imbalances in the Euro Area: Catching up or Competitiveness?," Ruhr Economic Papers 241, Rheinisch-Westfälisches Institut für Wirtschaftsforschung (RWI), Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
- Belke, Ansgar & Dreger, Christian, 2011. "Current account imbalances in the euro area: Catching up or competitiveness?," Discussion Papers 297, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.
- Belke, Ansgar & Dreger, Christian, 2011. "Current account imbalances in the euro area: Catching up or competitiveness?," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48711, Verein für Socialpolitik / German Economic Association.
- Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
- Jacques Mazier & Sophie Saglio, 2008. "Interdependency and adjustments in the European Union," International Review of Applied Economics, Taylor & Francis Journals, vol. 22(1), pages 17-44.
- Antonia López-Villavicencio & Jacques Mazier & Jamel Saadaoui, 2012. "Dimension temporelle et taux de change d'équilibre. Une application au cas des États-Unis," Revue économique, Presses de Sciences-Po, vol. 63(3), pages 535-544.
- Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
- Mickaël Clévenot & Vincent Duwicquet, 2011. "Partage du risque interrégional. Une étude des canaux budgétaires et financiers aux États-Unis et en Europe," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(4), pages 5-33.
- Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
- Se-Eun Jeong & Jacques Mazier, 2003. "Exchange Rate Regimes and Equilibrium Exchange Rates in East Asia," Revue économique, Presses de Sciences-Po, vol. 54(5), pages 1161-1182.
- William R. Cline & John Williamson, 2011. "Estimates of Fundamental Equilibrium Exchange Rates, May 2011," Policy Briefs PB11-5, Peterson Institute for International Economics.
- Wynne Godley & Marc Lavoie, 2006. "Comprehensive accounting in simple open economy macroeconomics with endogenous sterilization or flexible exchange rates," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 28(2), pages 241-276, January.
- Su Zhou, 1993. "Fundamental equilibrium exchange rates and exchange rate dynamics," Open Economies Review, Springer, vol. 4(2), pages 189-209, June.
- Vincent Duwicquet & Jacques Mazier, 2010. "Financial integration and macroeconomic adjustments in a monetary union," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 33(2), pages 333-370, January.
When requesting a correction, please mention this item's handle: RePEc:hal:journl:halshs-00848886. 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: (CCSD)
If references are entirely missing, you can add them using this form.