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Fiscal Discipline and the Question of Convergence of National Interest Rates in the European Union

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  • Volbert Alexander

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  • Peter Anker
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    Abstract

    In this paper, interest-rate convergence in Europe is related to the behavior of integrated federal political systems. Our main results are: Before the final fixing of exchange rates, national interest rates will converge toward the German bond yield in countries eligible to become EMU members in part because no-bailout clauses are not credible in the starting period of EMU. Should such clauses become more credible after 2002 because the EU government and its redistributive mechanisms remain weak, the “market-discipline hypothesis†has a greater chance to apply. But it may still prove unequal to the task of discouraging excessive fiscal deficits on its own. Copyright Kluwer Academic Publishers 1997

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    Bibliographic Info

    Article provided by Springer in its journal Open Economies Review.

    Volume (Year): 8 (1997)
    Issue (Month): 4 (October)
    Pages: 335-352

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    Handle: RePEc:kap:openec:v:8:y:1997:i:4:p:335-352

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    Web page: http://www.springerlink.com/link.asp?id=100323

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    Keywords: interest rates; financial markets; EMU; government debt;

    References

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    1. Garcia, R. & Perron, P., 1994. "An Analysis of the Real Interest rate Under Regime Shifts," Cahiers de recherche 9428, Universite de Montreal, Departement de sciences economiques.
    2. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
    3. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    4. Peter Isard & Michael P. Dooley, 1991. "Establishing Incentive Structures and Planning Agencies That Support Market-Oriented Transformations," IMF Working Papers 91/113, International Monetary Fund.
    5. Carlo Favero & Francesco Giavazzi & Luigi Spaventa, 1996. "High Yields: The Spread on German Interest Rates," NBER Working Papers 5408, National Bureau of Economic Research, Inc.
    6. Bayoumi, Tamim & Goldstein, Morris & Woglom, Geoffrey, 1995. "Do Credit Markets Discipline Sovereign Borrowers? Evidence from US States," CEPR Discussion Papers 1088, C.E.P.R. Discussion Papers.
    7. Rose, A.K. & Svensson, L.E.O., 1993. "European Exchange Rate Credibility Before the Fall," Papers 542, Stockholm - International Economic Studies.
    8. Buiter, Willem H & Corsetti, Giancarlo & Roubini, Nouriel, 1992. "`Excessive Deficits': Sense and Nonsense in the Treaty of Maastricht," CEPR Discussion Papers 750, C.E.P.R. Discussion Papers.
    9. Tabellini, Guido & Alesina, Alberto, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Scholarly Articles 3612769, Harvard University Department of Economics.
    10. Barry Eichengreen & Charles Wyplosz, 1993. "The Unstable EMS," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 51-144.
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    Cited by:
    1. Petr Hedbávný & Ondřej Schneider & Jan Zápal, 2005. "A Fiscal Rule That Has Teeth: A Suggestion for a "Fiscal Sustainability Council" Underpinned by the Financial Markets," Working Papers IES 79, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2005.
    2. Ermal Hitaj & Yasin Kursat Onder, 2013. "Fiscal Discipline in WAEMU: Rules, Institutions, and Markets," IMF Working Papers 13/216, International Monetary Fund.
    3. Richard Hule & Matthias Sutter, 2003. "Can the Stability and Growth Pact in EMU Cause Budget Deficit Cycles?," Empirica, Springer, vol. 30(1), pages 25-38, March.
    4. Anna Iara & Guntram B. Wolff, 2011. "Rules and risk in the euro area," Working Papers 615, Bruegel.

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