Sectoral allocation and macroeconomic imbalances in EMU

摘要

The study documents how, over 1996-2008, large capital inflows in Southern Europe coincided with broad-based growth of the nontradable sector, extending beyond the construction and real estate sectors. The authors present a tractable two-sector, two-region ('North' and 'South') model of a monetary union, in which they show how the sharp, permanent, fall in Southern real interest rates that occurred in the run-up to EMU can explain the Southern consumption boom, wage growth, growth of the nontradable sector, and deteriorating external position. Upward pressure on the EMU-wide interest rate induces an opposite process in North. Consequently, both real exchange rates and external positions of the two regions diverge. Including a third country with a flexible exchange rate vis-a-vis the euro amplifies the effects of monetary integration in South, while dampening them in North. The study confirms the key model predictions using a panel-BVAR for the euro area and investigate various policy reforms to facilitate the ongoing rebalancing process in the eurozone.