Testing the demand regime hypothesis in the Euro Area. Evidence from a VAR approach

ABSTRACT

The article brings new evidence that intra Euro Area trade imbalances should be thought of as the outcome of the interaction of opposing growth strategies between northern/surplus countries (Austria, Belgium, Germany, Netherlands) and southern/deficit countries (France, Italy, Portugal, Spain). By using a vector autoregression model, econometric evidence clarifies that the demand regime in the southern region is wage-led, while profit-led in the northern region. Moreover, a downward-wage adjustment in the northern region (negative wage shock) contributed to increasing the intra-EA trade surplus vis-à-vis the southern region by far more than an upward-wage adjustment in the southern region (positive wage shock).

KEYWORDS:

• Euro Area
• demand regime
• trade imbalances
• vector autoregression

JEL CLASSIFICATION:

• E12
• E22
• E25

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ According to Ederer, Onaram, and Stockhammer (2009), Euro Area demand regime is wage-led; nevertheless, strong heterogeneity exists among EA members, and thus different demand-regimes.

² This classification is based on the investigation of Stockhammer and Wildauer (2016).

³ The analysis focuses on short-term business cycle fluctuations, i.e. in a period of 2–5 years. Thus, no assumptions are made on long-term equilibrium, which would require a VEC model and cointegration analysis.

⁴ Estimates are available upon requests.