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Working Paper 228 - Overborrowing and Balance of Payments Imbalances in a Monetary Union
The most prominent feature of the Euro area crisis has been the large current account deficits and the large amount of debt accumulated by countries at the periphery. These imbalances are commonly attributed to differences in competitiveness as manifested in persistent differences in the unit labor costs. This paper takes a different perspective in line with empirical evidences. It argues that in order to understand imbalances within the euro area, it is necessary to consider the lower real cost of credit for high inflation countries in a monetary union as well as the inflow of capital to the non-tradable sector this implies. These two effects, the credit channel of monetary policy and the Dutch disease syndrome, and their interaction are important to understand balance of payments imbalances within the euro area.