Working Paper: CEPR ID: DP7262
Authors: Birgit Schmitz; Jürgen von Hagen
Abstract: While the current account of euro area as a whole has remained almost balanced in the past two decades, several member countries have sizeable deficits or surpluses. In this paper, we interpret these imbalances as indicators of net capital flows among the euro-area countries and show that these net flows follow differences in per-capita incomes. Our results show that the elasticity with respect to per-capita incomes of net capital flows between euro-area countries and the euro area has increased. This is not the case for net capital flows between non-euro area countries and the euro area, nor for euro-area countries and the rest of the world. We interpret this as evidence for increasing financial integration in the euro area. There is also some evidence suggesting that the introduction of the euro has lead to some financial diversion.
Keywords: current account imbalances; european monetary union; financial integration
JEL Codes: F21; F33; F34; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| current account balances (F32) | international capital flows (F32) |
| introduction of the euro (F36) | increase in capital flows from relatively rich to relatively poor countries within the euro area (F32) |
| per capita incomes (D31) | capital flows within the euro area (F32) |
| capital flows aligned with economic fundamentals (F32) | current account imbalances indicative of proper functioning of the euro area (F32) |
| per capita incomes (D31) | trade surpluses (F10) |