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Explaining and Correcting Trade imbalances between the Northern and Southern Eurozone: An Empirical Investigation

Litsios, I. & Pilbeam, K. ORCID: 0000-0002-5609-8620 (2022). Explaining and Correcting Trade imbalances between the Northern and Southern Eurozone: An Empirical Investigation. International Journal of Finance and Economics,

Abstract

In this paper we take a novel approach to examining the trade imbalances between the Southern Eurozone countries and the Northern Eurozone countries by aggregating them into a Southern Group and Northern Group. We then explore three possible causes of the trade imbalances, which are the fiscal channel, the investment channel and the competitiveness channel. We find that all three channels are important in explaining the emergence and correction of trade imbalances. In particular, we find that an increase in fiscal deficits in the North are twice as effective in reducing trade imbalances than fiscal consolidation in the South. By contrast, increased investment in the North has a similar impact to reduced investment in the South in correcting the trade imbalances. Finally, we find that a depreciation of the South’s real exchange rate is associated with a long run deterioration in the Southern Group’s trade balance suggesting that the South needs to seek non-price competitiveness channels to address its trade imbalances.

Publication Type: Article
Additional Information: This is the peer reviewed version of the following article: Pilbeam, K. & Litsios, I. (2022). Explaining and Correcting Trade imbalances between the Northern and Southern Eurozone: An Empirical Investigation. International Journal of Finance and Economics, which will be published in final form at http://onlinelibrary.wiley.com/journal/10.1002/(ISSN)1099-1158. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions. This article may not be enhanced, enriched or otherwise transformed into a derivative work, without express permission from Wiley or by statutory rights under applicable legislation. Copyright notices must not be removed, obscured or modified. The article must be linked to Wiley’s version of record on Wiley Online Library and any embedding, framing or otherwise making available the article or pages thereof by third parties from platforms, services and websites other than Wiley Online Library must be prohibited.
Publisher Keywords: Trade imbalances, Eurozone, fiscal deficits, national debts, investment, real exchange rate
Subjects: H Social Sciences > HG Finance
Departments: School of Policy & Global Affairs > Economics
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