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Current Account Imbalances and Cost Competitiveness: The Role of the Euro

Pilar Beneito () and Carlos Chafer
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Carlos Chafer: Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain).

No 1703, Working Papers from Department of Applied Economics II, Universidad de Valencia

Abstract: The changing environment that the Euro has brought to its member countries could have fuelled the deteriorating effect that net capital in ows have on cost competitiveness. This paper uses a di erence-in-di erences (DID) approach to assess the e ect of the Euro on the relationship between net capital infl ows, as measured by current account imbalances, and cost competitiveness over the period 1980-2014. The sample consists of annual data for 26 developed economies and comprises the EA12 countries as well as non-Euro countries, which are used as the comparison group in the analysis. First, we find evidence that positive capital in ows may negatively impact cost competitiveness levels in recipient countries. Second, and this is the main contribution of our paper, we find that the Euro seems to have amplified the deteriorating effect of net capital in ows on cost competitiveness. Therefore, although the policy debate is focused on constraining unit labour cost growth through structural reforms, additional macroprudential policies should be implemented to mitigate the detrimental e ect that capital in ows may have in an economy.

Keywords: current account imbalances; cost competitiveness; EMU; diff-in-differences (search for similar items in EconPapers)
JEL-codes: F32 F45 C21 C23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-int and nep-opm
Date: 2017-03
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