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External Imbalances in the Euro Area

  • Ruo Chen
  • Gian M 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
Handle: RePEc:imf:imfwpa:12/236
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