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Exchange Rate Misalignments, Fiscal Federalism and Redistribution: How to Adjust in a Monetary Union

Author

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  • Vincent Duwicquet

    () (CLERSE - Centre Lillois d’Études et de Recherches Sociologiques et Économiques - UMR 8019 - Université de Lille, Sciences et Technologies - ULCO - Université du Littoral Côte d'Opale - CNRS - Centre National de la Recherche Scientifique)

  • Jacques Mazier

    (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique)

  • Jamel Saadaoui

    () (BETA - Bureau d'Economie Théorique et Appliquée - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique)

Abstract

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.

Suggested Citation

  • Vincent Duwicquet & Jacques Mazier & Jamel Saadaoui, 2012. "Exchange Rate Misalignments, Fiscal Federalism and Redistribution: How to Adjust in a Monetary Union," Post-Print halshs-00848886, HAL.
  • Handle: RePEc:hal:journl:halshs-00848886 Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00848886
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    References listed on IDEAS

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    Cited by:

    1. Eugenio Caverzasi & Antoine Godin, 2013. "Stock-flow Consistent Modeling through the Ages," Economics Working Paper Archive wp_745, Levy Economics Institute.
    2. Saadaoui, Jamel, 2012. "Déséquilibres globaux, taux de change d’équilibre et modélisation stock-flux cohérente
      [Global Imbalances, Equilibrium Exchange Rates and Stock-Flow Consistent Modelling]
      ," MPRA Paper 51332, University Library of Munich, Germany.
    3. Engelbert Stockhammer & Cédric Durand & Ludwig List, 2015. "European growth models and working class restructuring before the crisis," Working Papers PKWP1508, Post Keynesian Economics Study Group (PKSG).
    4. Michalis Nikiforos & Gennaro Zezza, 2017. "Stock-flow Consistent Macroeconomic Models: A Survey," Economics Working Paper Archive wp_891, Levy Economics Institute.
    5. Stockhammer, Engelbert & Durand, Cédric & List, Ludwig, 2015. "Growth models and working class restructuring before the crisis," Economics Discussion Papers 2015-4, School of Economics, Kingston University London.

    More about this item

    Keywords

    Euro Zone Crisis; Exchange Rate Misalignments; Adjustments; Monetary Union; Euro Zone Crisis.;

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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