Premium
External and Macroeconomic Adjustment in the Larger Euro‐Area Countries
Author(s) -
Angelini Elena,
Ca’ Zorzi Michele,
Forster van Aerssen Katrin
Publication year - 2016
Publication title -
international finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 39
eISSN - 1468-2362
pISSN - 1367-0271
DOI - 10.1111/infi.12098
Subject(s) - economics , shock (circulatory) , current account , monetary economics , rest (music) , currency , aggregate demand , international economics , wage , macroeconomics , exchange rate , labour economics , monetary policy , medicine , cardiology
A balanced current account in the euro area has disguised sizable imbalances at the country level, exposing the common currency area to severe pressures during the financial crisis. The key contribution of this paper is to evaluate the adjustment process using the New Multi Country Model (NMCM) at the country and sectoral levels. The model suggests that a recovery in wage competitiveness reduces external deficits but has only mildly expansionary effects at the cost of higher net borrowing by households. It also suggests that the impact of an aggregate demand shock in Germany is not enough to lead to a rebound in economic activity and address external imbalances in the rest of the euro area. Finally, the presence of supportive external conditions, while facilitating the implementation of vital reforms, would not necessarily unravel intra‐euro‐area imbalances.