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

Hubert Gabrisch


The nearly exclusive explanation for current account imbalances in the euro area blames wage policy for being responsible for trade imbalances and the split between debtor and creditor countries. This essay argues that cross-border capital flows come first and affect aggregate demand and production costs. Trade flows and the real exchange rate adjust. The rationale of this reversed argument is Keynes’ liquidity theory of interest. The policy implications prefer more capital controls against controls of wage formation.

Keywords: finance, liquidity preference, trade imbalances, euro area

JEL Classification: E12; E43; F36


finance, liquidity preference, trade imbalances, euro area

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DOI: http://dx.doi.org/10.13133/2037-3643_70.281_3


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