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The Euro’s Effect on Trade Imbalances

Author/Editor: Berger, Helge | Nitsch, Volker
Authorized for Distribution: October 1, 2010
Electronic Access: Free Full Text (PDF file size is 1,094KB)
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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: When does trade become a one-way relationship? We study bilateral trade balances for a sample of 18 European countries over the period from 1948 through 2008. We find that, with the introduction of the euro, trade imbalances among euro area members widened considerably, even after allowing for permanent asymmetries in trade competitiveness within pairs of countries or in the overall trade competitiveness of individual countries. This is consistent with indications that pair-wise trade tends to be more balanced when nominal exchange rates are flexible. Intra-euro area imbalances also seem to have become more persistent with the introduction of the euro, some of which is linked to labor market inflexibility. Reviewing the direction of imbalances, we find that bilateral trade surpluses are decreasing in the real exchange rate, decreasing in growth differentials, and increasing in the relative volatility of national business cycles. Finally, countries with relatively higher fiscal deficits and less flexible labor and product markets exhibit systematically lower trade surpluses than others.
 
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Series: Working Paper No. 10/226
Subject(s): Balance of trade | Bilateral trade | Cross country analysis | Euro | Euro Area | Europe | Exchange rate regimes | Labor market policy | Time series
Author's keyword(s): imbalances | trade balance | trade surplus | trade deficit | euro | EMU | European integration
 
English  
    Published:   October 1, 2010        
            Format:   Paper
    Stock No:   WPIEA2010226   Pages:   30
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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