External imbalances in the euro area require real exchange rate adjustments. This Rue de la Banque explores the consequences of the euro area external adjustment in a framework where (i) the extensive margin (new exporting firms) contributes to aggregate trade flows, and (ii) cross-country differences in terms of firms’ productivity distribution are taken into account. Surplus countries in the euro area have larger and more productive firms than deficit countries. When deficit countries adjust their external imbalances, the magnitude of the required real exchange rate depreciation may be larger than traditional calculations might suggest.
Updated on: 05/04/2017 17:30