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Some Unpleasant Euro Arithmetic

Guillaume Gaulier () and Vincent Vicard

CEPII Policy Brief from CEPII research center

Abstract: Current estimates of misalignments in real effective exchange rates show that euro area imbalances are still large: Germany exhibits a 20 percentage point undervaluation compared to the rest of the euro area (EA). Within a monetary union, rebalancing requires price adjustments through differentials in inflation rates. The rebalancing process therefore involves a 2 percentage point higher inflation in Germany than in the rest of the EA over a decade, or a 1 pp over two decades. It also requires above 2% inflation in surplus countries to meet the 2% ECB inflation target. At the current pace, rebalancing is a 20 year process and requires sustained very low inflation rates in the rest of the euro area.

Keywords: Current account imbalances; Euro area; Exchange rates misalignments (search for similar items in EconPapers)
JEL-codes: E31 F32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac, nep-mon and nep-opm
Date: 2018-01
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Persistent link: https://EconPapers.repec.org/RePEc:cii:cepipb:2018-21

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