Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/153150 
Year of Publication: 
2007
Series/Report no.: 
ECB Working Paper No. 716
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
In this paper we argue that, for a group of converging economies of the European Union, participation in the euro area has been associated with easier access to financing by domestic economic agents. Easier access to financing was a significant impulse leading to a sharp increase in households' expenditures and a corresponding fall in the savings ratio. Increased expenditure was associated with current account deficits, a sharp fall in the net foreign asset position and an increase in the households' indebtedness. At the same time there was a sizeable increase in the real exchange rate. In this paper, we show that it is possible to obtain all these qualitative features of adjustment using a simple analytical model of intertemporal equilibrium. Specifically, we consider a simple endowment economy with traded and non-traded goods populated by Blanchard-Yaari households. We also argue that the consideration of external habit formation improves the model's ability to mimic short to medium term adjustment dynamics while, at the same time, improving the plausibility of steady state effects.
Subjects: 
euro area
interest rate convergence
overlapping generations model
JEL: 
F36
E21
F32
Document Type: 
Working Paper

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