A Sectoral Net Lending Perspective on Europe

Florentin Glötzl, Armon Rezai

Publication: Working/Discussion PaperWU Working Paper

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The paper investigates net lending and net borrowing flows of the institutional sectors in Europe since the introduction of the Euro in 1999. Applying a simple statistical apparatus, this paper is novel in describing the sectoral behavior leading up to and during the crisis. We find that (1) many countries of the Northern group were characterized by low public deficits or even budget surpluses, current account surpluses and a private sector in a net lending position. In countries of the Southern periphery, in the Anglo-Saxon countries as well as in many Eastern European Economies private sector net borrowing coincided with a budget deficit and substantial current account deficits. (2) With the onset of the crisis private net lending soared in all countries while all governments incurred deficits, consistent with the notion of a balance sheet recession. (3) Private net lending is pro-cyclical, reinforcing the economic downturn, while public net lending is countercyclical in all countries. (4) Household net lending tends to lead the business cycle, while corporate net lending tends to lag it especially in the Northern group. (5) Prominent concepts asserting causal relationships in sectoral net lending, such as Ricardian equivalence and the twin deficit hypothesis are not supported by the data.
Original languageEnglish
Publication statusPublished - 2016

Publication series

SeriesEcological Economic Papers

Austrian Classification of Fields of Science and Technology (ÖFOS)

  • 502027 Political economy
  • 502046 Economic policy
  • 502047 Economic theory
  • 502018 Macroeconomics

WU Working Paper Series

  • Ecological Economic Papers

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