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The magnitude of euro area misalignments

Bruno Ducoudré, Xavier Timbeau () and Sébastien Villemot ()

No 45, Sciences Po publications from Sciences Po

Abstract: Using real equilibrium exchange rate modelling, we quantify adjustments within the euro area compatible with a current account equilibrium and a stabilisation of the net external positions of t he euro area countries. Our estimates indicate that the imbalances have shrunk since 2008, but substantial misalignments remain, and the average (absolute) mismatch relative to the euro price level amounts to 10% in 2017. The imbalances now weigh on the external equilibrium of the euro area and are increasing the risk of a medium -term appreciation in the euro. These results are robust to hypotheses on the horizon of adjustment, potential growth, output gaps and real interest rates.

Keywords: Equilibrium exchange rate; Trade balance; Price competitiveness (search for similar items in EconPapers)
JEL-codes: E31 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-mac and nep-opm
Date: 2018-12
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