Trade Imbalances within the Euro Area and with Respect to the Rest of the World

Abstract

Many studies have explored the determinants of current account balances in Europe. However, only in a few studies have trade imbalances been decomposed into intra balances, trade balances vis-à-vis the euro area, and extra balances, trade balances vis-à-vis the rest of the world. In this paper, we apply this decomposition and augment the previous studies of this type by including a larger set of theoretically plausible explanatory variables derived from the current account literature. We observe that, contrary to Schmitz and von Hagen (2011), the introduction of common currency has not increased the elasticity of trade flows to per capita incomes within the euro area for the member countries. In addition, this framework reveals that there is significant heterogeneity among the usual determinants of trade balances whether those contribute to intra balances or extra balances.

Keywords: Current account, Trade balance vis-à-vis the euro area, Trade balance vis-à-vis the rest of the world, European monetary union, Culture, Institutions

JEL Classification: F21, F32, F33, F36, Z10