Single currency and fiscal performance: the early Euro Area in perspective



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Jalles, Joao Tovar and Mulas Granados, Carlos and Tavares, José and Correa Caro, Carolina (2018) Single currency and fiscal performance: the early Euro Area in perspective. Applied Economics Letters, 25 (6). pp. 415-419. ISSN 1350-4851

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We examine how exchange rate regimes affect fiscal discipline by investigating European countries as they transitioned from flexible to fully fixed exchange rates under the Euro. We apply the synthetic control method to estimate, for each Eurozone country, its counterfactual budget stance under flexible rates. Our evidence strongly suggests that fixing exchange rates negatively impacted negatively fiscal discipline. However, effects were not homogeneous, as they were mediated by political factors. For example, countries where policymakers faced a longer political horizon and operated within a more cohesive political environment, managed to perform better in terms of fiscal discipline.

Item Type:Article
Uncontrolled Keywords:Synthetic control method, Euro Area, Fixed exchange rates, Fiscal discipline, Political economy; Exchange rate; Statistical analysis
Subjects:Social sciences > European Union > European Economic and Monetary Union
Social sciences > European Union > Economic and financial policy
Social sciences > European Union > European fiscal policy
Social sciences > Economics > Money
Social sciences > Economics > Econometrics
Social sciences > Economics > Finance
Social sciences > Economics > Economic integration
JEL:H30, H60, E50
ID Code:54966
Deposited On:09 Apr 2019 12:15
Last Modified:10 Apr 2019 08:50

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