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Current account and fiscal imbalances in the Euro-area: Siamese twins in an asymmetrical currency union

  • Rosaria Rita canale

    ()

  • Ugo Marani

    ()

In this paper a model connecting fiscal and external imbalances in Euro peripheral countries is presented. The underlying idea is that, after the negative shock of the 2007 financial crisis, the current account position constitutes the main element in originating different behavior of foreign lenders toward single countries. Once the interaction between the two has started, it turns into a never ending self-fulfilling process. For peripheral countries, positive results of fiscal retrenchments and real devaluation to restore stability and stop capital outflows are subject to unlikely conditions that undermine the improvements of public accounts. The choice governments face is therefore, at least in the short run and in recessive conditions, either to restore the equilibrium of public finance, or to counteract the real shocks coming from the crisis. This conclusion suggests to adopt shared policy instruments to contrast centrifugal forces in EMU.

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Paper provided by Department of Economics, University of Siena in its series Department of Economics University of Siena with number 659.

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Date of creation: Oct 2012
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Handle: RePEc:usi:wpaper:659
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  1. Pakko, Michael R., 2000. "Do high interest rates stem capital outflows?," Economics Letters, Elsevier, vol. 67(2), pages 187-192, May.
  2. Guillermo A. Calvo, 1998. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 35-54, November.
  3. Giancarlo Corsetti & Gernot J. Müller, 2005. "Twin Deficits: Squaring Theory, Evidence and Common Sense," Economics Working Papers ECO2005/22, European University Institute.
  4. Pietro Alessandrini & Michele Fratianni & Andrew Hughes Hallett & Andrea Filippo Presbitero, 2012. "External imbalances and financial fragility in the euro area," Mo.Fi.R. Working Papers 66, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  5. Barro, Robert J, 1989. "The Ricardian Approach to Budget Deficits," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 37-54, Spring.
  6. Silvia Merler & Jean Pisani-Ferry, 2012. "Sudden Stops in the Euro Area," Review of Economics and Institutions, Università di Perugia, vol. 3(3).
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