Heterogeneity, Convergence and Imbalances in the Euro Area

Stéphane Auray and Aurélien Eyquem

No 2017-64, Working Papers from Center for Research in Economics and Statistics

Abstract: The inception of the euro allowed countries from the periphery to experience a large fall in the cost of borrowing. Lower nominal rates were only partially o?set by lower in?ation rates. We rationalize this real interest rate reversal using a two-region model of a monetary union where, consistently with real interest rate data, discount factors are initially heterogeneous, leading the periphery to be borrowing-constrained. We model the inception of the euro as a partial convergence process in in?ation rates and a slow rise in the discount factor of the periphery, relaxing the borrowing constraint. This simple set-up accounts for the bulk of post-euro ?uctuations in both regions. In particular, it replicates very well the observed joint dynamics of current accounts and terms of trade

Keywords: Monetary union; in?ation convergence; current account imbalances; borrowing constraints (search for similar items in EconPapers)
JEL-codes: E32 E52 F32 F41 F45 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2017-01-11
New Economics Papers: this item is included in nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Heterogeneity, convergence and imbalances in the Euro area (2021)
Working Paper: Heterogeneity, convergence and imbalances in the Euro area (2021)
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