An Iberian Disease? On Current Account Imbalances Within a Monetary Union

29 Pages Posted: 9 Oct 2010

See all articles by Nuno Coimbra

Nuno Coimbra

London Business School; London Business School

Date Written: July 9, 2010

Abstract

During the process of accession to the Eurozone, some member countries experienced a rapid increase in credit availability fueled by the fast convergence of interest rates. This was accompanied by large current account deficits and booms in the housing sector. This paper argues that these features are intimately related to the fast expansion of the household credit market, namely the financing of housing purchases. A model is presented of a small open economy where the fall of interest rates is associated with an increase in the collateral value of housing, which in turn shifts production towards the housing sector. This also impacts on competitiveness, leading to a deterioration of the trade balance. Similar effects may also imply an asymmetry across member countries in the transmission of monetary policy, depending on how important collateral constraints are in each country.

Keywords: DSGE Models, Monetary Union, Current Account, Collateral Constraint, Housing

JEL Classification: E10, E30, E50, C11

Suggested Citation

Coimbra, Nuno and Coimbra, Nuno, An Iberian Disease? On Current Account Imbalances Within a Monetary Union (July 9, 2010). Available at SSRN: https://ssrn.com/abstract=1689570 or http://dx.doi.org/10.2139/ssrn.1689570

Nuno Coimbra (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

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