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Sectoral allocation and macroeconomic imbalances in EMU

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  • Niels Gilbert

    (De Nederlandsche Bank)

  • Sebastiaan Pool

    (De Nederlandsche Bank)

Abstract

We document how, over 1996–2008, large capital inflows in Southern Europe coincided with broad-based growth of the nontradable sector, extending beyond the construction and real estate sectors. We then present a tractable two-sector, two-region (‘North’ and ‘South’) model of a monetary union, in which we show how the sharp, permanent, fall in Southern real interest rates that occurred in the run-up to EMU can explain the Southern consumption boom, wage growth, growth of the nontradable sector, and deteriorating external position. Upward pressure on the EMU-wide interest rate induces an opposite process in North. Consequently, both real exchange rates and external positions of the two regions diverge. Including a third country with a flexible exchange rate vis-à-vis the euro amplifies the effects of monetary integration in South, while dampening them in North. We confirm the key model predictions using a panel-BVAR for the euro area and investigates various policy reforms to facilitate the ongoing rebalancing process in the eurozone.

Suggested Citation

  • Niels Gilbert & Sebastiaan Pool, 2020. "Sectoral allocation and macroeconomic imbalances in EMU," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 156(4), pages 945-984, November.
    • Handle: RePEc:spr:weltar:v:156:y:2020:i:4:d:10.1007_s10290-020-00388-w
    DOI: 10.1007/s10290-020-00388-w
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    2. Mark Mink & Jan Jacobs & Jakob de Haan & Jakob de Haan, 2016. "Euro Area Imbalances," CESifo Working Paper Series 6291, CESifo.

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    More about this item

    Keywords

    EMU; Monetary integration; Current account imbalances; Sectoral allocation;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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