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

João Tovar Jalles, Carlos Mulas-Granados, José Tavares, Carolina Correa Caro

Research output: Contribution to journalArticle

Abstract

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.

Original languageEnglish
Pages (from-to)415-419
Number of pages5
JournalApplied Economics Letters
Volume25
Issue number6
DOIs
Publication statusPublished - 30 Mar 2018

Keywords

  • Euro Area
  • fiscal discipline
  • fixed exchange rates
  • political economy
  • Synthetic control method

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