Euro area external imbalances and the burden of adjustment

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The paper is released in order to make the research of CompNet generally available, in preliminary form, to encourage comments and suggestions prior to final publication. The views expressed in the paper are the ones of the author(s) and do not necessarily reflect those of the ECB, the ESCB, and of other organisations associated with the Network. Terms of use: Documents in EconStor may ECB Working Paper 1681, May 2014 1Non-technical summaryThe rebalancing of external accounts across countries is traditionally seen in the economic literature, in the context of the so called transfer problem. The basic mechanism of the adjustment is a transfer of real resources from debtor countries to the rest of the world, leading to a decrease in domestic spending relative to production, and to a simultaneous relative increase abroad. The macroeconomic costs of the external rebalancing may be divided conceptually in two parts: the decrease in domestic spending and welfare (the primary burden of a transfer), and the real exchange rate depreciation (the secondary burden of a transfer). As Obstfeld and Rogo (2001), (2005), (2007) Drawing from this literature, this paper adds two main elements. First, it concentrates on the external readjustment of Euro area countries, which has the double dimension of adjustments within the area (i.e. in the common currency) and outside the euro area (which include changes in the euro exchange rate). To do so, the paper presents a three-country general equilibrium model with a tradable and a non-tradable sector, where rms are heterogeneous in terms of their productivity. Second, it utilises for the calibration of the model a novel rm level data base collected by CompNet, a competitiveness research network among EU central banks. The rm-level empirical evidence collected by the network shows that rm size and productivity are highly heterogeneous across Euro area countries. More specically, in each Euro area country, rm productivity is not normally distributed. The distribution of rm productivity is rather characterised by a relatively large number of low productive rms and a small number of highly productive rms.The mechanism of transmission in the model is as follows. The transfer of resources associated with the external adjustment increases the demand of exports of the decit countries, while decreasing their demand of imports. The higher relative demand for tradable goods produced by the decit country leads to a decrease in the producti...

Accounting for the Differences Between Gross and Value Added Trade Balances

“…We demonstrate that the major determinant behind this increasing discrepancy is the rising importance of the part of the trade balance which is due to demand in countries other than the two direct trading partners. Particularly in a currency union, it is important to establish with whom trade imbalances exist since the burden of adjustment may differ between trade deficits vis‐á‐vis member countries and third parties (di Mauro and Pappadà, ). Even though their limitations are widely acknowledged gross bilateral trade balances still figure widely in the economic literature and policy debates (Bahmani‐Oskooee and Brooks, ; Davis and Weinstein, ).…”

Economic sustainability and possibilities of action for the states, in the case of monetary integration: some notes for reflection

“…It is a long and complex process, during which agents have less options, feeling, moreover, that 'who pays the cost' of return to competitiveness can swing between wages and profits ( Figure 7). In this line, the work of di Mauro and Pappadà (2014) data show that, 'with respect to the surplus country (Germany), countries running a trade deficit (Spain, Italy) are characterised by a productivity distribution with a lower mean and a less fat right tail (lower skewness)'. For these countries, the adjustment of trade balances requires a larger relative price movement because of the limited role played by the extensive margin.…”

Firm Heterogeneity and Trade in EU Countries: A Cross-Country Analysis

“…the amount of goods exported by existing exporters) of export growth (for example, Amiti, Itskhoki and Konings, 2014;Berthou and Dhyne, 2018); and (ii) countries where a large mass of firms are close to the "productivity threshold", above which they start selling abroad, require smaller movements in the REER to achieve aggregate export gains because of the larger role of the extensive margin (i.e. the entry of new exporting firms into the market; for instance, see di Mauro and Pappadà, 2014).…”

“…CompNet data, di Mauro and Pappadà (2014) show that the thickness of the right tail of the productivity distribution affects the extent to which the extensive margin of trade contributes to the increase in aggregate exports. This result is, however, valid only in static terms.…”