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External debt and real exchange rates’ adjustment in the euro area: New evidence from a non linear NATREX model

Abstract : In this paper we revisit medium- to long-run real exchange rate determination within the euro area, focusing on the role of external debt. Accordingly, we rely on the NATREX approach which provides an explicit framework of the external debt-real exchange rates nexus. In particular, given the indebtedness levels reached by the euro area economies, we investigate potential non-linearity in real exchange rates dynamics, according to the level of the external debt. Our results evidence that during the monetary union, gross and net external debt positions of the euro area countries have exerted pressures on real exchange rate dynamics within the area. Moreover, we find that, beyond a threshold reached by the external debt, euro area countries are found to be in a vulnerable position, leading to an unavoidable adjustment process. Nevertheless, the adjustment process, while effective, is found to be low and occurs slowly.
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https://hal-univ-pau.archives-ouvertes.fr/hal-01880331
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Submitted on : Monday, September 24, 2018 - 4:51:24 PM
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  • HAL Id : hal-01880331, version 1

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Cécile Couharde, Serge Rey, Audrey Allegret-Sallenave. External debt and real exchange rates’ adjustment in the euro area: New evidence from a non linear NATREX model. 2015. ⟨hal-01880331⟩

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