Explaining trade imbalances in the euro area: Liquidity preference and the role of finance





finance, liquidity preference, trade imbalances, euro area


Extant literature nearly exclusively explains the current account imbalances in the euro area by blaming wage policy. Mainstream economics considers wage policy as responsible for both trade imbalances and the split between debtor and creditor countries. In contrast, this article argues that cross-border capital flows come first, and affect aggregate demand and production costs. Trade flows and the real exchange rate adjust to financial flows. The rationale of this reversed argument is Keynes’ liquidity theory of interest. The policy implications drawn from the argument point in the direction of more capital controls rather than controls on wage formation.

JEL Classification: E12; E43; F36

Author Biography

Hubert Gabrisch, Wiesbaden Institute for Law and Economics

Research Associate


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How to Cite

Gabrisch, H. (2017). Explaining trade imbalances in the euro area: Liquidity preference and the role of finance. PSL Quarterly Review, 70(281), 155–184. https://doi.org/10.13133/2037-3643_70.281_3