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The sustainability of external imbalances in the European periphery

Vassilis Monastiriotis and Cigdem Borke Tunali

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: The issue of external imbalances has become a key concern in the global economy, gaining particular prominence also inside Europe, following the Eurozone crisis. Comparatively, however, evidence for the European periphery is much less developed. In this study we investigate the sustainability of external imbalances in 15 countries from the EU’s so-called eastern and super-periphery across a range of sustainability tests. We find that external imbalances are, on the whole, large and, despite some significant adjustments in the post-crisis period, they continue to follow paths that are possibly unsustainable. Our results show a higher likelihood of confirming sustainability when looking separately at the current account and the net foreign asset position than when looking jointly at the current and capital accounts (and thus at the intertemporal budget constraint – Bohn J Monet Econ 54(7):1837–1847, 2007). This suggests, albeit tentatively, problems and vulnerabilities that go beyond simple concerns about price competitiveness and the trade performance of the countries under study.

Keywords: external imbalances; current account sustainability; European periphery; error correction (search for similar items in EconPapers)
JEL-codes: F32 F41 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2020-04-01
New Economics Papers: this item is included in nep-eec
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Published in Open Economies Review, 1, April, 2020, 31(2), pp. 273 - 294. ISSN: 0923-7992

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