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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, doi: 10.1002/ijfe.2722

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: © 2022 The Authors. International Journal of Finance & Economics published by John Wiley & Sons Ltd. This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.
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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