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Explaining trade imbalances in the euro area: Liquidity preference and the role of finance

Author

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  • Hubert Gabrisch

    (Wiesbaden Institute for Law and Economics (WILE))

Abstract

Extant literature nearly exclusively explains the current account imbalances in the euro area by blaming wage policy. Mainstream economics considers wage policy as responsible for both trade imbalances and the split between debtor and creditor countries. In contrast, this article argues that cross-border capital flows come first, and affect aggregate demand and production costs. Trade flows and the real exchange rate adjust to financial flows. The rationale of this reversed argument is Keynes’ liquidity theory of interest. The policy implications drawn from the argument point in the direction of more capital controls rather than controls on wage formation.

Suggested Citation

  • Hubert Gabrisch, 2017. "Explaining trade imbalances in the euro area: Liquidity preference and the role of finance," PSL Quarterly Review, Economia civile, vol. 70(281), pages 155-184.
    • Handle: RePEc:psl:pslqrr:2017:23
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    References listed on IDEAS

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    Cited by:

    1. Jan Priewe, 2018. "A time bomb for the Euro? Understanding Germany's current account surplus," IMK Studies 59-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.

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    More about this item

    Keywords

    finance; liquidity preference; trade imbalances; euro area;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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