Progress Towards External Adjustment in the Euro Area Periphery and the Baltics

32 Pages Posted: 14 Aug 2014

See all articles by Joong Shik Kang

Joong Shik Kang

International Monetary Fund (IMF)

Jay Shambaugh

Dartmouth College - Department of Economics; Georgetown University - Department of Strategy/Economics/Ethics/Public Policy

Date Written: July 2014

Abstract

The euro area periphery countries and the Baltic countries, which had large current account deficits in the run-up to the crisis, needed adjustment of relative prices to achieve both internal and external balances. Thus far, tangible progress has been made through lower wages and/or higher productivity relative to trading partners (“internal devaluation”), which contributed to narrowing current account deficits and shifting output towards the tradables sector. While some early adjusters cut wages more rapidly followed by productivity improvement, others have only slowly improved productivity largely through labor shedding. This adjustment for most countries has come along with a substantial recession as the unit labor cost improvement has largely come from falling employment and much of the current account improvement from import compression. Going forward, these countries still need to generate growing tradables sector employment and to continue adjustment to prevent imbalances from returning as output gaps close.

Keywords: Current account deficits, Euro Area, Baltics, Price adjustments, Unit labor cost, Wage adjustments, Unemployment, Current account deficit, Internal devaluation, Competitiveness, current account, employment, unemployment rates, current account balances, recession, current account adjustment, high unemployment rates, unemployment rate, high unemployment, current account imbalances, labor market, labor productivity, full employment, balance of payment, employment decline, labor force, employment growth, labor force survey, number of employees, current account adjustments, employment losses, employment data, equilibrium unemployment, balance of payment statistics

JEL Classification: F24, F32, F41

Suggested Citation

Kang, Joong Shik and Shambaugh, Jay, Progress Towards External Adjustment in the Euro Area Periphery and the Baltics (July 2014). IMF Working Paper No. 14/131. Available at SSRN: https://ssrn.com/abstract=2480280

Joong Shik Kang

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Jay Shambaugh

Dartmouth College - Department of Economics ( email )

309 Rockefeller Hall
Hanover, NH 03755
United States
603-646-9345 (Phone)
603-646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~economic/faculty/Shambaugh/

Georgetown University - Department of Strategy/Economics/Ethics/Public Policy

Washington, DC 20057
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
36
Abstract Views
290
PlumX Metrics