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External Imbalances in the Euro Area

  • Ruo Chen
  • Gian-Maria Milesi-Ferretti
  • Thierry Tressel

The paper examines the extent to which current account imbalances of euro area countries are related to intra-euro area factors and to external trade shocks. We argue that the traditional explanations for the rising imbalances are correct, but are incomplete. We uncover a large impact of declines in export competitiveness and asymmetric trade developments vis-à-vis the rest of the world –in particular vis-à-vis China, Central and Eastern Europe, and oil exporters- on the external balance of euro area debtor countries. While current account imbalances of euro area deficit countries vis-à-vis the rest of the world increased, they were financed mostly by intra-euro area capital inflows (in particular by the purchase of government and financial institutions’ securities, and cross-border interbank lending) which permitted external imbalances to grow over time.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/236.

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Length: 49
Date of creation: 28 Sep 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/236
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  1. 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.
  2. Michael D. Bordo & Agnieszka Markiewicz & Lars Jonung, 2011. "A Fiscal Union for the Euro: Some Lessons from History," NBER Working Papers 17380, National Bureau of Economic Research, Inc.
  3. Coeurdacier, Nicolas & Martin, Philippe, 2007. "The geography of asset trade and the euro: insiders and outsiders," CEPREMAP Working Papers (Docweb) 0701, CEPREMAP.
  4. Mark M. Spiegel, 2009. "Monetary and Financial Integration in the EMU: Push or Pull?," Review of International Economics, Wiley Blackwell, vol. 17(4), pages 751-776, 09.
  5. Philip R. Lane & Gian-Maria Milesi-Ferretti, 2006. "The External Wealth of Nations Mark II; Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004," IMF Working Papers 06/69, International Monetary Fund.
  6. Jappelli, Tullio & Pagano, Marco, 1992. "Saving, Growth and Liquidity Constraints," CEPR Discussion Papers 662, C.E.P.R. Discussion Papers.
  7. Lane, Philip R, 2005. "Global Bond Portfolios and EMU," MPRA Paper 654, University Library of Munich, Germany, revised 15 Feb 2006.
  8. 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.
  9. Westerlund, Joakim, 2005. "Testing for Error Correction in Panel Data," Working Papers 2005:11, Lund University, Department of Economics.
  10. Alejandro Micco & Ernesto Stein & Guillermo OrdoÒez, 2003. "The currency union effect on trade: early evidence from EMU," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 315-356, October.
  11. Olivier Blanchard, 2007. "Adjustment within the euro. The difficult case of Portugal," Portuguese Economic Journal, Springer, vol. 6(1), pages 1-21, April.
  12. Mark M. Spiegel, 2004. "Monetary and financial integration: evidence from the EMU," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue aug6.
  13. Bogdan Lissovolik & Julio Escolano & Stefania Fabrizio & Werner Schule & Herman Z. Bennett & Stephen Tokarick & Yuan Xiao & Marialuz Moreno Badia & Eva Gutierrez & Iryna V. Ivaschenko, 2008. "Competitiveness in the Southern Euro Area; France, Greece, Italy, Portugal, and Spain," IMF Working Papers 08/112, International Monetary Fund.
  14. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
  15. Bayoumi, Tamim, 1998. "Estimating Trade Equations from Aggregate Bilateral Data," CEPR Discussion Papers 1970, C.E.P.R. Discussion Papers.
  16. Sven Blank & Claudia M Buch, 2007. "The Euro and Cross-Border Banking: Evidence from Bilateral Data," Comparative Economic Studies, Palgrave Macmillan, vol. 49(3), pages 389-410, September.
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