Current Account Imbalances, Household Consumption and Debt in the Euro Area: A Tale of Two Financial Liberalizations

31 Pages Posted: 17 Apr 2018

See all articles by Benedicta Marzinotto

Benedicta Marzinotto

Università degli Studi di Udine - Department of Economics

Date Written: March 2018

Abstract

This paper explores the extent to which financial liberalization in the euro area had a differentiated impact on members’ private consumption patterns and in turn on their current account positions as a function of who got indebted in the first place. Theoretically, it builds on an inter-temporal consumption model augmented with household heterogeneity. Low/middle income groups are impatient and credit-constrained, whilst high-income groups are patient and under no constraint. Increased access to credit in previously financially repressed countries implies a relaxation of collateral constraints specifically for low-income groups, who differently from high-income agents borrow to finance current consumption. It follows that financial liberalization is associated with deteriorating external positions there where initial levels of financial openness and inclusion are lowest and the share of the low/middle-income group largest.

Keywords: Current account; income inequality; financial liberalization; debt leverage; panel regressions

JEL Classification: F32; F41; E2

Suggested Citation

Marzinotto, Benedicta, Current Account Imbalances, Household Consumption and Debt in the Euro Area: A Tale of Two Financial Liberalizations (March 2018). Robert Schuman Centre for Advanced Studies Research Paper No. RSCAS 2018/15, Available at SSRN: https://ssrn.com/abstract=3157557 or http://dx.doi.org/10.2139/ssrn.3157557

Benedicta Marzinotto (Contact Author)

Università degli Studi di Udine - Department of Economics ( email )

Via Tomadini 30
33100 Udine
Italy

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