Current account deficits and public debt in the Euro area

This dissertation deals with current account deficits and public debt in the Euro area. The thesis is in three parts. In part one, I assess movements in relative prices which are necessary to achieve an output-neutral reversal of the current account deficits that arose in Greece, Italy, Portugal and Spain after the introduction of the Euro. I study the topic using a static general equilibrium model, which, in contrast to earlier literature, allows for supply-side effects as well as for third-country-effects with countries outside of the Euro area. The central finding is that supply-side-effects as well as third-country-effects significantly affect the magnitude of the required adjustments in relative prices. Part two studies the long-run sustainability of Austrian public debt using a Markov chain model of the debt-GDP ratio and several key macroeconomic variables. It turns out that the historical record of Austrian fiscal policy is consistent with a stable long-run distribution of the debt-GDP ratio with an expected value close to the 60 percent threshold of the Maastricht treaty. The strong increase in the debt-GDP ratio in the aftermath of the recent financial crisis should furthermore be seen as a transitory tail event rather than as a sign of long-run unsustainability. Part three discusses the sources of current account deficits in Greece, Ireland, Portugal and Spain after the introduction of the Euro using an estimated dynamic stochastic general equilibrium model. The central findings confirm the role of interest rate convergence within the Euro area for the formation of the deficits.