External Imbalances, Gross Capital Flows, and Sovereign Debt Crises

Sergio de Ferra

Journal of the European Economic Association, 2021, vol. 19, issue 1, 347-402

Abstract: The experience of the European monetary union has been characterized by current account imbalances, widening gross external positions, and a severe sovereign debt crisis. I argue that institutional features of the European Economic and Monetary Union have contributed to all three. I show in a model that subsidies on holdings of assets issued within the union contribute to current account imbalances, to gross capital flows, and to the severity of the crisis. In a quantitative model with heterogeneous countries, I show that the subsidies account for a substantial fraction of the widening of gross external positions in the euro area by inducing countries with high income and external assets to engage in intermediation of gross capital flows.

Date: 2021
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Working Paper: External Imbalances, Gross Capital Flows and Sovereign Debt Crises (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:jeurec:v:19:y:2021:i:1:p:347-402.

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