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Persistent global growth differences and Euro Area adjustment: real activity, trade and the real exchange rate

Author

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  • Ifrim, Adrian
  • Kollmann, Robert
  • Pfeiffer, Philipp
  • Ratto, Marco
  • Roeger, Werner

Abstract

Based on an estimated two-region dynamic general equilibrium model, we show that the persistent productivity growth differential between the Euro Area (EA) and rest of the world (RoW) has been a key driver of the EA trade surplus since the launch of the Euro. A secular decline in the EA’s spending home bias and a trend decrease in relative EA import prices account for the stability of the EA real exchange rate, despite slower EA output growth. By incorporating trend shocks to growth and trade, the analysis departs from much of the open-economy macroeconomics literature which has focused on stationary disturbances. Our results highlight the relevance of non-stationary shocks for the analysis of external adjustment.

Suggested Citation

  • Ifrim, Adrian & Kollmann, Robert & Pfeiffer, Philipp & Ratto, Marco & Roeger, Werner, 2025. "Persistent global growth differences and Euro Area adjustment: real activity, trade and the real exchange rate," MPRA Paper 125401, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:125401
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    References listed on IDEAS

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    Cited by:

    1. Adrian Ifrim & Robert Kollmann & Philipp Pfeiffer & Marco Ratto & Werner Roeger, 2025. "Europe’s Trade Surplus, International Relative Prices, and the Productivity Growth Gap," Working Papers ECARES 2025-12, ULB -- Universite Libre de Bruxelles.

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    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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