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

 
Author/Editor: Joong Shik Kang ; Jay C. Shambaugh
 
Publication Date: July 22, 2014
 
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
 
Summary: 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.
 
Series: Working Paper No. 14/131
Subject(s): Current account deficits | Euro Area | Baltics | Price adjustments | Unit labor cost | Wage adjustments | Unemployment

 
English
Publication Date: July 22, 2014
ISBN/ISSN: 9781498364713/1018-5941 Format: Paper
Stock No: WPIEA2014131 Pages: 31
Price:
US$18.00
 
 
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