Heterogeneity, convergence and imbalances in the Euro area
The inception of the euro allowed countries from the periphery to experience a large fall in the cost of borrowing. Lower nominal rates were only partially offset by lower inflation rates. We rationalize this real interest rate reversal using a two-region model of a monetary union where, consistentl...
Enregistré dans:
| Auteurs principaux: | , |
|---|---|
| Format: | Article ou chapitre numérique |
| Sprog: | Français |
| Udgivet: |
2022
|
| Fag: | |
| Online adgang: | Accès Université d'Orléans et IFPM Accès Université d'Orléans et IFPM |
| Summary: | The inception of the euro allowed countries from the periphery to experience a large fall in the cost of borrowing. Lower nominal rates were only partially offset by lower inflation rates. We rationalize this real interest rate reversal using a two-region model of a monetary union where, consistently with real interest rate data, discount factors are initially heterogeneous, leading the periphery to be borrowing-constrained. We model the inception of the euro as a partial convergence process in inflation rates and a slow rise in the discount factor of the periphery, relaxing the borrowing constraint. This simple set-up accounts for the bulk of post-euro fluctuations in both regions. In particular, it replicates very well the observed joint dynamics of current accounts and terms of trade. |
|---|