JEL Code: F33

Gunther Schnabl

Abstract

The paper scrutinizes the role of diverging fiscal policy stances for diverging current account positions in Europe with a focus on the European Monetary Union (EMU). In a heterogeneous monetary union fiscal policy has the task to absorb asymmetric shocks to ensure the efficacy of the one-size monetary policy. It is argued that since the early years of the European Monetary Union divergent fiscal policies combined with monetary expansion constituted a major determinant of current account divergence within the euro area, which finally led into the European debt and financial crisis. Panel regressions reveal a significant impact of fiscal policies on current account positions, which to a large extent are independent from the exchange rate regime and turn out to be contingent on monetary and fiscal policy mix. Based on the findings economic policy recommendations are presented.

Keywords: current account imbalances, Europe, European financial and debt crisis, European Monetary Union, exchange rate adjustment, fiscal policy, macroeconomic policy coordination.

JEL Codes: F32, F33, F42, H62.

Erschienen in

The Economists’ Voice, vol. 15, no. 1, 2018, pp. 20180026.

Download

via Degruyter

Sophia Latsos; Gunther Schnabl

Abstract

The paper shows that currencies of countries with persistent current account surpluses and high foreign-currency denominated assets, such as the Swiss franc and the Japanese yen, are under persistent appreciation pressure, particularly when the centres of the world monetary system follow expansionary monetary policies. This limits the choice of exchange rate regime. Given flexible exchange rates, a negative risk premium on the domestic interest rate can emerge. Empirical estimations provide mixed evidence for a negative impact of net foreign asset positions and exchange rate uncertainty on interest rates of international creditor countries at the periphery of the world monetary system.

Keywords: appreciation pressure, exchange rate risk, Japanese yen, negative risk premium, self-fulfilling expectations, Swiss franc.

JEL Codes: F15, F31, F33.

Erschienen in

Int Econ Econ Policy 15, 261–280 (2018).

Download

via SpringerLink

Sophia Latsos; Gunther Schnabl

Abstract

The paper shows that currencies of countries with persistent current account surpluses and high foreign-currency denominated assets, such as the Swiss franc and the Japanese yen, are under persistent appreciation pressure, particularly when the centres of the world monetary system follow expansionary monetary policies. This limits the choice of exchange rate regime. Given flexible exchange rates, a negative risk premium on the domestic interest rate can emerge. Empirical estimations provide mixed evidence for a negative impact of net foreign asset positions and exchange rate uncertainty on interest rates of international creditor countries at the periphery of the world monetary system.

Keywords: appreciation pressure, exchange rate risk, Japanese yen, negative risk premium, self-fulfilling expectations, Swiss franc.

JEL Codes: F15, F31, F33.

Erschienen in

CESifo Working Paper No. 5490 (August 2015).

Download

Via IDEAS