The magnitude of euro area misalignments in 2017

Bruno Ducoudre (1) , Xavier Timbeau (1) , Sébastien Villemot (2, 3, 4)

1 OFCE - Observatoire français des conjonctures économiques (Sciences Po)
2 PSE - Paris School of Economics
3 PJSE - Paris Jourdan Sciences Economiques
4 CEPREMAP - Centre pour la recherche économique et ses applications

Using real equilibrium exchange rate modelling, we quantify adjustments within the euro area compatible with a current account equilibrium and a stabilisation of the net external positions of t he euro area countries. Our estimates indicate that the imbalances have shrunk since 2008, but substantial misalignments remain, and the average (absolute) mismatch relative to the euro price level amounts to 10% in 2017. The imbalances now weigh on the external equilibrium of the euro area and are increasing the risk of a medium -term appreciation in the euro. These results are robust to hypotheses on the horizon of adjustment, potential growth, output gaps and real interest rates.

Keywords: Equilibrium exchange rate; Trade balance; Price competitiveness

Domains: Economics and Finance

Bruno Ducoudre, Xavier Timbeau, Sébastien Villemot. The magnitude of euro area misalignments in 2017. 2018. ⟨hal-03389334⟩