Testing the demand regime hypothesis in the Euro Area. Evidence from a VAR approach

Giovanni Covi

Applied Economics Letters, 2018, vol. 25, issue 9, 632-637

Abstract: The article brings new evidence that intra Euro Area trade imbalances should be thought of as the outcome of the interaction of opposing growth strategies between northern/surplus countries (Austria, Belgium, Germany, Netherlands) and southern/deficit countries (France, Italy, Portugal, Spain). By using a vector autoregression model, econometric evidence clarifies that the demand regime in the southern region is wage-led, while profit-led in the northern region. Moreover, a downward-wage adjustment in the northern region (negative wage shock) contributed to increasing the intra-EA trade surplus vis-à-vis the southern region by far more than an upward-wage adjustment in the southern region (positive wage shock).

Date: 2018
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DOI: 10.1080/13504851.2017.1352075

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