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Adjusting to the Euro

Author

Listed:
  • Gabriel Fagan
  • Vítor Gaspar

Abstract

In this paper we argue that, for a group of converging economies of the European Union, participation in the euro area has been associated with easier access to financing by domestic economic agents. Easier access to financing was a significant impulse leading to a sharp increase in households' expenditures and a corresponding fall in the savings ratio. Increased expenditure was associated with current account deficits, a sharp fall in the net foreign asset position and an increase in the households' indebtedness. At the same time there was a sizeable increase in the real exchange rate. In this paper, we show that it is possible to obtain all these qualitative features of adjustment using a simple analytical model of intertemporal equilibrium. Specifically, we consider a simple endowment economy with traded and non-traded goods populated by Blanchard-Yaari households. We also argue that the consideration of external habit formation improves the model's ability to mimic short to medium term adjustment dynamics while, at the same time, improving the plausibility of steady state effects.

Suggested Citation

  • Gabriel Fagan & Vítor Gaspar, 2007. "Adjusting to the Euro," Working Papers w200703, Banco de Portugal, Economics and Research Department.
  • Handle: RePEc:ptu:wpaper:w200703
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    File URL: https://www.bportugal.pt/sites/default/files/anexos/papers/wp200703.pdf
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    Citations

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    Cited by:

    1. Philip R. Lane, 2008. "EMU and Financial Market Integration," The Institute for International Integration Studies Discussion Paper Series iiisdp248, IIIS.
    2. Fernando Alexandre & Pedro Bação & João Cerejeira & Miguel Portela, 2010. "Manufacturing employment and exchange rates in the Portuguese economy: the role of openness, technology and labour market rigidity," NIPE Working Papers 22/2010, NIPE - Universidade do Minho.
    3. Holger Zemanek & Ansgar Belke & Gunther Schnabl, 2010. "Current account balances and structural adjustment in the euro area," International Economics and Economic Policy, Springer, vol. 7(1), pages 83-127, May.
    4. Philip Lane, 2011. "The Irish Crisis," The Institute for International Integration Studies Discussion Paper Series iiisdp356, IIIS.
    5. Pradeep Mitra & Marcelo Selowsky & Juan Zalduendo, 2010. "Turmoil at Twenty : Recession, Recovery, and Reform in Central and Eastern Europe and the Former Soviet Union," World Bank Publications, The World Bank, number 2682, December.
    6. Marques, Luis B, 2007. "The Costs to Consumers of a Depreciated Conversion Rate to the Euro," MPRA Paper 5723, University Library of Munich, Germany.
    7. Clancy, Daragh & Merola, Rossana, 2017. "Countercyclical capital rules for small open economies," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 332-351.
    8. Pedro Bação & António Portugal Duarte, 2011. "Accession to the European Union, Interest Rates and Indebtedness: Greece and Portugal," Book Chapters, Institute of Economic Sciences.
    9. repec:eee:mateco:v:74:y:2018:i:c:p:1-20 is not listed on IDEAS

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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