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Trade Dynamics in the Euro Area: A Disaggregated Approach by Wierts, van Kerkhoff and de Haan

Explore the impact of current account deficits in Euro area countries, analyzing factors like real exchange rate appreciation and export growth. Comments and suggestions by Harry Flam Institute for International Economic Studies.

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Trade Dynamics in the Euro Area: A Disaggregated Approach by Wierts, van Kerkhoff and de Haan

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  1. Trade Dynamics in the Euro Area: A Disaggregated Approach by Wierts, van Kerkhoff and de Haan Comments by Harry Flam

  2. Background • Southern periphery countries have run relatively large and persistent current account deficits since joining the monetary union • Part can be explained by appreciating real exchange rate • It is shown that the relation between growth of unit labor cost and export growth is negative but weak / Harry Flam Institute for International Economic Studies

  3. Background comment • Figure 1 only gives partial story: • It leaves out the effect of income growth – the mirror of unit labor cost growth – and imports, and • it only shows exports of goods. The southern periphery countries – Greece, Spain and Portugal – have large service exports, tourism and in the case of Greece shipping (56 % of total exports). / Harry Flam Institute for International Economic Studies

  4. Basic idea • Southern periphery exports low technology goods and core exports high technology • Low technology goods have high price elasticity and low income elasticity • Therefore, southern periphery is hit especially hard by real exchange rate appreciation / Harry Flam Institute for International Economic Studies

  5. Comment on basic idea • Interesting complementary explanation of large and persistent current account deficits • Main explanation must be credit expansion and fiscal policies allowing real wage appreciation / Harry Flam Institute for International Economic Studies

  6. Lagged realizations of dependent variable included for all countries to allow for time trend. Comment 1: The variable common time dummy captures the common element of the trend (?) Comment 2: Time trend OK in present context, but not in the papers referenced. Comments on gravity equation / Harry Flam Institute for International Economic Studies

  7. Comments on the results • The result that price elasticy falls with level of technology rests on difference between medium high and high, not on continuous decrease • The result on income elasticity is hard to interpret • The result that northern periphery’s – Ireland’s and Finland’s (Nokia!) – exports have higher price elasticy than core and southern periphery runs counter to basic hypothesis / Harry Flam Institute for International Economic Studies

  8. Suggestions • Estimate the gravity equation for each euro country as a robustness check – the averages could hide dispersion that runs counter to the basic hypothesis • Calculate the effect of giving the southern periphery the same price and/or income elasticities as the core on the deficits – would give an idea of the importance of the differences / Harry Flam Institute for International Economic Studies

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