Holger Zemanek from the University of Leipzig and I have jointly drafted a recent application of the “Equilibrium model of global imbalances revisited” on intra euro area imbalances. The working paper has been published by the University of Leipzig in its Working Paper Series.
Körner, Finn Marten and Holger Zemanek. On the brink? Intra euro-area imbalances and the sustainability of foreign debt. Working Paper No. 109, University of Leipzig, ISSN: 1437-9384, Jul. 2012.
In this paper we study the intra-euro area imbalances based on a dynamic general equilibrium model. We show that European financial integration and the introduction of the euro might have contributed to the development of imbalances. Interest rate convergence following EMU accession led to net foreign debt positions, which prove difficult to reverse. Simulation results for the euro area suggest that current account imbalances and foreign debt positions of today’s crisis countries have significantly diverged from a sustainable path. Increasing investment in the EMU core and productivity in crisis countries may permit a return to sustainable foreign debt levels and correct macroeconomic imbalances in the euro area.
Keywords: Current account imbalances, euro area, foreign debt, sustainability, general equilibrium model
JEL-Codes: E44, F32, F34, G15