Keyword: fiscal policy

Taiki Murai; Gunther Schnabl

Abstract

The paper analyses the role of fiscal and monetary policy for the development of the current account imbalances in the euro area, including the most recent developments during the coronavirus crisis. Several financial transmission channels such as international bank lending, changes in TARGET2 balances, international rescue credit and government bond purchases of euro area central banks are identified. It is found that differing fiscal policy stances which have interacted differently with the ECB’s monetary policy have been at roots of first diverging and then converging current account positions in the euro area. Since the European financial and debt crisis, public financing mechanisms and the unconventional monetary of the ECB have contributed to the persistence of intra-euro area current account imbalances.

Keywords: current account, current account imbalances, EU, euro, European Monetary Union, financial account, fiscal policy, Monetary policy, TARGET2.

JEL Codes: F320, F330, F420, H620.

Erschienen in

CESifo Working Paper No. 9153.

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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.

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Pablo Duarte; Gunther Schnabl

Abstract

Since a series of crisis events after 2007, the discussion about the adjustment channels of current account imbalances has been revived. We discuss the effectiveness of exchange rates versus macroeconomic policies to rebalance current accounts for a set of 86 mainly emerging market economies. We find that nominal exchange rates are not a sufficient adjustment channel for (unsustainable) current account positions. Instead, depending on the region, monetary and/or fiscal policies are the main determinants of current accounts. For East Asia and the oil exporting countries sterilization policies, i.e. relatively tight monetary policies, are the main determinants. In contrast the main driving forces for emerging and southern Europe are fiscal policy stances. Only for the Latin American countries the exchange rate seems to play a significant role.

Keywords: exchange rate adjustment, fiscal policy, global imbalances, intra-european imbalances, Monetary policy.

JEL Codes: E42, F31, F43.

Erschienen in

Review of Development Economics, Volume 19, Issue 3, pp 531-544.

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