External imbalances in the eurozone

Estimating the effect of the EMU on current account balances: A synthetic control approach

“…More specifically, I use macroeconomic data from OECD countries and a counterfactuals-based approach-the synthetic control method-to estimate the causal effect of the EMU on the current account balances of individual member states. This paper contributes to the empirical literature on the effect of EMU on current account balances, which has yet to come to a consensus about whether the imbalances were caused by the EMU (Belke and Dreger, 2013;Campa and Gavilan, 2011;Schmitz and von Hagen, 2011) or by factors external to the currency union (Chen et al, 2013;Guerrieri and Esposito, 2013). The synthetic control approach is ideally suited to fill this Policymakers in the euro area have started to pay more attention to external imbalances in the wake of the euro crisis.…”

“…Chen et al (2013) and Guerrieri and Esposito (2013) find evidence of several external trade shocksthe sharp rise in oil prices, the emergence of China as a major exporter of low-value added manufactured goods and the movement of Continental European production chains to Central and Eastern European countries-that affected the northern and southern EMU member states differently during the 2000s, and hence contributed to the current account imbalances.…”

Trade imbalances within the euro area and with respect to the rest of the world

“…(Schnabl and Freitag 2012. ) Chen et al (2013) make an important observation by saying that the explanations for euro area current account imbalances highlighted above, namely, the catching-up process and diverging competitiveness, rely on intra-euro area factors. However, the euro area as a whole is an open economy; therefore, trade and financial linkages between the euro area and the rest of the world are also important.…”

“…By including an interaction term between the EMU dummy variable and GDP per capita, we can detect if the introduction of the euro somehow changed the sensitivity of net capital flows on differences in per capita incomes. Chen et al (2013) criticized previous studies for concentrating on intra-euro area factors. In our case, this is what we desire because we are trying to understand trade imbalances within the euro area.…”

Labor Market Reforms and Current Account Imbalances - Beggar-Thy-Neighbor Policies in a Currency Union?

“…They nd a signicant but small contribution of structural policy indicators to explain current account positions. Chen et al (2013), however, doubts a strong contribution of labor market reforms, arguing that the presence of asymmetric shocks results in strong current account imbalances. In this paper we follow an indirect approach that treats structural reforms as a change in institutional settings rather than a shock.…”