Explaining trade imbalances in the euro area: Liquidity preference and the role of finance

Hubert Gabrisch

PSL Quarterly Review, 2017, vol. 70, issue 281, 155-184

Abstract: Extant literature nearly exclusively explains the current account imbalances in the euro area by blaming wage policy. Mainstream economics considers wage policy as responsible for both trade imbalances and the split between debtor and creditor countries. In contrast, this article argues that cross-border capital flows come first, and affect aggregate demand and production costs. Trade flows and the real exchange rate adjust to financial flows. The rationale of this reversed argument is Keynes’ liquidity theory of interest. The policy implications drawn from the argument point in the direction of more capital controls rather than controls on wage formation.

Keywords: finance; liquidity preference; trade imbalances; euro area (search for similar items in EconPapers)
JEL-codes: E12 E43 F36 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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