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Causality within the Euro Area? : Trade Surplus in the North versus Public Debt in the South

Author

Listed:
  • K. Zestos, George

    (Christopher Newport University)

  • K. Taylor, Travis

    (Christopher Newport University)

  • D. Patnode, Ryan

    (Christopher Newport University)

Abstract

The United States subprime mortgage crisis began to spread to Europe in 2008. The worst affected were periphery countries that experienced drastic declines in international competitiveness and thus accumulated large public debts. High public debt drove countries such as Greece, Ireland, Portugal, Cyprus, and Spain to the verge of economic collapse. This study examines whether trade imbalances led to high public indebtedness in the periphery euro area countries. To investigate the impact of northern euro area countries’ trade surpluses on southern euro area countries’ public debt, we estimated bivariate and trivariate Vector Error Correction Models. We then employed these estimated models to test for Granger causality between trade imbalances and public debt. We found that trade surpluses in the northern euro area countries caused an increase in public debt in the periphery countries. However, only limited evidence for reverse causality was found.

Suggested Citation

  • K. Zestos, George & K. Taylor, Travis & D. Patnode, Ryan, 2016. "Causality within the Euro Area? : Trade Surplus in the North versus Public Debt in the South," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 31(4), pages 898-931.
    • Handle: RePEc:ris:integr:0702
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    Citations

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    Cited by:

    1. Zestos, George & Jiang, Yixiao & Hamed, Alex & Raymond, Samuel, 2023. "Public debt, current account, and economic growth in Germany: Evidence from a nonlinear ARDL model," The Journal of Economic Asymmetries, Elsevier, vol. 28(C).
    2. George K. Zestos & Rachel N. Cooke, 2020. "Challenges for the EU as Germany Approaches Recession," Economics Working Paper Archive wp_948, Levy Economics Institute.
    3. Zestos, George & Simmons, Morgan H., 2018. "Why a Eurozone Collapse should not be a Surprise: The Role of Germany and Greece," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 71(3), pages 227-256.
    4. George K. Zestos & Harrison Whittleton & Alejandro Fernandez-Ribas, 2022. "Reflections on Angela Merkel's Career as Chancellor of Germany and the Greek Financial Odyssey," Economics Working Paper Archive wp_1010, Levy Economics Institute.
    5. George K. Zestos & Wei Guo & Ryan Patnode, 2018. "Determinants of Real Chinese GDP 1978–2014," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 46(2), pages 161-177, June.
    6. Ioannatos, Petros E., 2021. "Systematic growth asymmetry in the Eurozone? Evidence from a natural experiment," The Journal of Economic Asymmetries, Elsevier, vol. 24(C).

    More about this item

    Keywords

    European Sovereign Debt Crisis; Trade Imbalances; Cointegration; Vector Error Correction Models; Granger Causality Tests;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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