External and Macroeconomic Adjustment in the Larger Euro Area Countries

33 Pages Posted: 15 Mar 2014

See all articles by Elena Angelini

Elena Angelini

European Central Bank (ECB)

Michele Ca' Zorzi

European Central Bank (ECB)

Katrin Forster

European Central Bank (ECB)

Date Written: February 18, 2014

Abstract

A balanced current account in the euro area has disguised sizeable net lending imbalances at the country level, exposing the common currency area to severe pressures during the financial crisis. The key contribution of this paper is to evaluate the adjustment process through the lenses of the New Multi Country Model at the country and sectoral level. We find that shocks to the external, fiscal and monetary environment help explain, to a large degree, the sizeable current account adjustment and rise in unemployment in Spain. The model also suggests that a recovery in wage competitiveness helps to reduce external deficits at the cost of higher net borrowing by households. The stimulus effects on aggregate demand, via the interest rate response of the common monetary authority and the competitiveness channel, are present but not overly large, as the rebound in economic activity depends mainly on global demand, supportive monetary policy, business and consumer confidence.

Keywords: net lending, euro area countries, current account, modeling

JEL Classification: C5, F32, F41, O52

Suggested Citation

Angelini, Elena and Ca' Zorzi, Michele and Forster, Katrin, External and Macroeconomic Adjustment in the Larger Euro Area Countries (February 18, 2014). ECB Working Paper No. 1647. Available at SSRN: https://ssrn.com/abstract=2397785

Elena Angelini (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
49 69 1344 7912 (Phone)
44 69 1344 6575 (Fax)

Michele Ca' Zorzi

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Katrin Forster

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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