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

Author

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  • Rosaria Rita canale

    ()

  • Ugo Marani

    ()

Abstract

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.

Suggested Citation

  • Rosaria Rita canale & Ugo Marani, 2012. "Current account and fiscal imbalances in the Euro-area: Siamese twins in an asymmetrical currency union," Department of Economics University of Siena 659, Department of Economics, University of Siena.
  • Handle: RePEc:usi:wpaper:659
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    File URL: http://repec.deps.unisi.it/quaderni/659.pdf
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    References listed on IDEAS

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    1. Barro, Robert J, 1989. "The Ricardian Approach to Budget Deficits," Journal of Economic Perspectives, American Economic Association, pages 37-54.
    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. 1, pages 35-54, November.
    3. Silvia Merler & Jean Pisani-Ferry, 2012. "Sudden Stops in the Euro Area," Review of Economics and Institutions, Università di Perugia.
    4. Pakko, Michael R., 2000. "Do high interest rates stem capital outflows?," Economics Letters, Elsevier, vol. 67(2), pages 187-192, May.
    5. 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.
    6. Barro, Robert J, 1989. "The Ricardian Approach to Budget Deficits," Journal of Economic Perspectives, American Economic Association, pages 37-54.
    7. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2008. "High exchange-rate volatility and low pass-through," Journal of Monetary Economics, Elsevier, pages 1113-1128.
    8. Giancarlo Corsetti & Gernot J. Müller, 2006. "Twin deficits: squaring theory, evidence and common sense," Economic Policy, CEPR;CES;MSH, vol. 21(48), pages 597-638, October.
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    Cited by:

    1. Ugo Marani, 2014. "Economic monetary union and regional divergences: the legacy of Augusto Graziani," STUDI ECONOMICI, FrancoAngeli Editore, pages 159-171.

    More about this item

    Keywords

    EMU; sovereign debt crisis; current account imbalances; national policies;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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