Sectoral allocation and macroeconomic imbalances in EMU

Niels Gilbert and Sebastiaan Pool ()
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Sebastiaan Pool: De Nederlandsche Bank

Review of World Economics (Weltwirtschaftliches Archiv), 2020, vol. 156, issue 4, No 8, 945-984

Abstract: Abstract We document how, over 1996–2008, large capital inflows in Southern Europe coincided with broad-based growth of the nontradable sector, extending beyond the construction and real estate sectors. We then present a tractable two-sector, two-region (‘North’ and ‘South’) model of a monetary union, in which we show how the sharp, permanent, fall in Southern real interest rates that occurred in the run-up to EMU can explain the Southern consumption boom, wage growth, growth of the nontradable sector, and deteriorating external position. Upward pressure on the EMU-wide interest rate induces an opposite process in North. Consequently, both real exchange rates and external positions of the two regions diverge. Including a third country with a flexible exchange rate vis-à-vis the euro amplifies the effects of monetary integration in South, while dampening them in North. We confirm the key model predictions using a panel-BVAR for the euro area and investigates various policy reforms to facilitate the ongoing rebalancing process in the eurozone.

Keywords: EMU; Monetary integration; Current account imbalances; Sectoral allocation (search for similar items in EconPapers)
JEL-codes: F32 F34 F36 F45 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10290-020-00388-w

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