Fiscal Divergence and Current Account Imbalances in Europe

39 Pages Posted: 19 Feb 2013

See all articles by Gunther Schnabl

Gunther Schnabl

University of Leipzig - Institute for Economic Policy

Timo Wollmershaeuser

Ifo Institute for Economic Research; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: February 18, 2013

Abstract

Since the breakdown of the Bretton Woods System diverging current account positions in Europe have prevailed. While the Southern and Western European countries have tended to run current account deficits, the current accounts of the Central and Northern European countries, in particular Germany, have tended to be in surplus. The paper scrutinizes the role of diverging fiscal policy stances for current account imbalances in Europe since the early 1970s under alternative institutional monetary arrangements (floating exchange rates, European Monetary System, and European Monetary Union). It sheds light on the interaction of fiscal and monetary policies with respect to their impact on the current account and analyses the role of exchange rate changes and credit facilities as adjustment mechanisms for current account imbalances. Panel regressions reveal a robust impact of fiscal policy divergence on current account imbalances, which to a large extent is independent from the exchange rate regime, but which turns out to be contingent on the monetary policy stance.

Keywords: Europe, EMU, EMS, current account imbalances, exchange rate adjustment, credit mechanisms, European debt crisis

JEL Classification: H620, F320, F330, F420

Suggested Citation

Schnabl, Gunther and Wollmershaeuser, Timo, Fiscal Divergence and Current Account Imbalances in Europe (February 18, 2013). CESifo Working Paper Series No. 4108. Available at SSRN: https://ssrn.com/abstract=2220133

Gunther Schnabl

University of Leipzig - Institute for Economic Policy ( email )

Institute for Economic Policy
Grimmaische Stra├če 12
Leipzig, 04109
Germany

HOME PAGE: http://www.wifa.uni-leipzig.de/iwp/

Timo Wollmershaeuser (Contact Author)

Ifo Institute for Economic Research ( email )

Poschingerstrasse 5
Munich, 81879
Germany
+49 89 9224 1406 (Phone)
+49 89 9224 1462 (Fax)

HOME PAGE: http://www.ifo.de/link/wollmershaeuser_t.htm

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
189
Abstract Views
896
rank
163,817
PlumX Metrics