Tracking the causes of eurozone external imbalances: new evidence and some policy implications

• Published in: International economics and economic policy Vol. 13; no. 4; pp. 641 - 668
• Main Authors: Diaz-Sanchez, Jose L., Varoudakis, Aristomene
• Format: Journal Article
• Language: English
• Published: Berlin/Heidelberg Springer Berlin Heidelberg 01.10.2016; Springer; Springer Nature B.V
• Subjects: Analysis; Central banks; Competition; Cost control; Economic crisis; Economic growth; Economic models; Economic Policy; Economic statistics; Economic theory; Economics; Economics and Finance; European Monetary Union; Eurozone; Fiscal policy; Foreign exchange rates; Interest rates; International Economics; International finance; Labor costs; Macroeconomics; Macroeconomics/Monetary Economics//Financial Economics; Monetary policy; Original Paper; Public Finance; Sovereign debt; Studies; Surveillance; Ireland; Spain; Europe; C33; F41; F32; Growth; Panel VAR; Competitiveness; External imbalances; Eurozone
• ISSN: 1612-4804; 1612-4812
• DOI: 10.1007/s10368-015-0316-0

The paper assesses the contribution of key drivers of external imbalances in the Eurozone through the estimation of a panel-data Vector Autoregressive model over 1975–2011. Growth fluctuations, initially associated with demand booms triggered by unusually low interest rates, and later with demand contractions resulting from the crisis and policy adjustments, have played an important role in current account balance fluctuations. Changes in real exchange rates or unit labor costs have played a less important role. Demand shocks have contributed more to current account balance dynamics in the Eurozone periphery than in the core, whereas competitiveness has been a less prominent factor in the periphery but relatively more important in the core. Some broad policy implications of the findings for demand management in a currency union are discussed, including for fiscal policy coordination and macroprudential policies when union members face asymmetric shocks. The role of internal devaluation policies as a means of correcting external imbalances is also reassessed.