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Is there a "reform fatigue" in the euro area?

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  • Vamvakidis, Athanasios
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    Abstract

    The absence of monetary policy within a currency union increases the need for structural reforms that make the participating economies more flexible. However, the absence of exchange rate risk with respect to the other members of the union may reduce the urgency for such reforms. A number of other considerations also suggest that theory is ambiguous about the impact of participating in a currency union on progress in structural reforms. This paper addresses this issue empirically for the euro area. The results suggest that reforms in the euro area seem to have decelerated following the introduction of the euro, but from a fast pace. The paper discusses a number of possible explanations, including "reform fatigue," the absence of "market punishment," and "good-times" complacency. Estimates from an empirical growth model suggest that the slowing of reforms may slow down annual output growth by up to 0.2%. However, the results are preliminary and depend on the area of reform considered. Furthermore, the reform dynamics may change with the euro area starting slowing at the end of 2007.

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    File URL: http://www.sciencedirect.com/science/article/B6VB1-4TJC0KS-1/2/f0a5b1188b772bf8ad294524d446c2e3
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    Bibliographic Info

    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 26 (2009)
    Issue (Month): 4 (July)
    Pages: 767-777

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    Handle: RePEc:eee:ecmode:v:26:y:2009:i:4:p:767-777

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    Web page: http://www.elsevier.com/locate/inca/30411

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    Keywords: Economic reform Monetary union Euro area;

    References

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    1. Mariano Tommasi & Andres Velasco, 1995. "Where Are We in the Political Economy of Reform?," Working Papers 11, Universidad de San Andres, Departamento de Economia, revised Apr 1996.
    2. David Moore & Athanasios Vamvakidis, 2007. "Economic Growth in Croatia: Potential and Constraints," IMF Working Papers 07/198, International Monetary Fund.
    3. Dani Rodrik, 1996. "Understanding Economic Policy Reform," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 9-41, March.
    4. Athanasios Vamvakidis, 2007. "External Debt and Economic Reform: Does a Pain Reliever Delay the Necessary Treatment?," IMF Working Papers 07/50, International Monetary Fund.
    5. Temple, Jonathan, 2000. "Growth Regressions and What the Textbooks Don't Tell You," Bulletin of Economic Research, Wiley Blackwell, vol. 52(3), pages 181-205, July.
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