Current Account Imbalances in the Euro Area (Draft Version)

45 Pages Posted: 23 Jul 2009

See all articles by Alan G. Ahearne

Alan G. Ahearne

National University of Ireland, Galway (NUIG) - Department of Economics

Birgit Schmitz

University of Bonn

Jürgen von Hagen

University of Bonn

Date Written: March 2007

Abstract

The dispersion in current account balances among countries in the euro area has widened markedly over the past decade-and-a-half, and especially since 1999. We decompose current account positions for euro area countries into intra-euro-area balances and extra-euroarea balances and examine the determinants of these balances. Regarding intra-euro-area balances, we present evidence that capital tends to flow from high-income euro area economies to low-income euro area economies. These flows have increased since the creation of the single currency in Europe. We construct a novel data set regarding extra-euro-area balances. The data set contains, for the euro area and the most important member economies, exports and imports to and from the 10 respective most important trade partners outside the euro area. This allows us to study the determinants of the extra-euro current account and its interaction with intra-euro area trade balances. We estimate a model of the trade balance of the euro area and individual euro-area countries with the rest of the world. We find that a real appreciation of the euro against the currencies of its main trading partners appears to have a substantial effect on the euro area’s net exports in the long run, though the immediate effect is small. Our estimates for individual countries suggest that the adjustment to a real appreciation of the euro would not be equally distributed across euro-area countries. In particular, Germany would bear the largest share of the adjustment, while the other large euro-area economies would be relatively unaffected. Finally, we find that the introduction of the euro seems to have changed the dynamics of trade balance adjustment in three of the larger euro-area economies.

Keywords: global imbalances, EMU, real exchange rates, trade balances

Suggested Citation

Ahearne, Alan G. and Schmitz, Birgit and Hagen, Jürgen von, Current Account Imbalances in the Euro Area (Draft Version) (March 2007). CASE Network Studies and Analyses No. 345, Available at SSRN: https://ssrn.com/abstract=1436932 or http://dx.doi.org/10.2139/ssrn.1436932

Alan G. Ahearne (Contact Author)

National University of Ireland, Galway (NUIG) - Department of Economics ( email )

Newcastle Road
Galway
Ireland

Birgit Schmitz

University of Bonn ( email )

IIW Institute for International Economics
Lennéstr. 37
D-53113 Bonn
Germany

Jürgen von Hagen

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

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