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External and macroeconomic adjustment in the larger euro area countries

Elena Angelini, Michele Ca' Zorzi and Katrin Forster

No 1647, Working Paper Series from European Central Bank

Abstract: A balanced current account in the euro area has disguised sizeable net lending imbalances at the country level, exposing the common currency area to severe pressures during the financial crisis. The key contribution of this paper is to evaluate the adjustment process through the lenses of the New Multi Country Model at the country and sectoral level. We find that shocks to the external, fiscal and monetary environment help explain, to a large degree, the sizeable current account adjustment and rise in unemployment in Spain. The model also suggests that a recovery in wage competitiveness helps to reduce external deficits at the cost of higher net borrowing by households. The stimulus effects on aggregate demand, via the interest rate response of the common monetary authority and the competitiveness channel, are present but not overly large, as the rebound in economic activity depends mainly on global demand, supportive monetary policy, business and consumer confidence. JEL Classification: C5, F32, F41, O52

Keywords: current account; euro area countries; modeling; net lending (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-opm
Note: 338657
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Journal Article: External and Macroeconomic Adjustment in the Larger Euro-Area Countries (2016) Downloads
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