Single currency and fiscal performance: the early Euro Area in perspective |
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Authors: | João Tovar Jalles José Tavares Carolina Correa Caro |
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Institution: | 1. Fiscal Affairs Department, International Monetary Fund, United States;2. Department of Economics, New School of Business and Economics in Lisbon, Portugal;3. Inter-American Development Bank, Social Sector Department, United States |
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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. |
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Keywords: | Synthetic control method Euro Area fixed exchange rates fiscal discipline political economy |
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