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Does it pay to have the euro? Italy’s politics and financial markets under the lira and the euro

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Author Info
Marcel Fratzscher () (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
Livio Stracca () (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)

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Abstract

There is a broad consensus that the quality of the political system and its institutions are fundamental for a country’s prosperity. The paper focuses on political events in Italy over the past 35 years and asks whether the adoption of the euro in 1999 has helped insulate Italy’s financial markets from the adverse consequences of its traditionally unstable political system. We find that important political events have exerted a statistically and economically significant effect on Italy’s financial markets throughout the 1970s, 1980s and 1990s. The introduction of the euro appears to have indeed played a major role in insulating financial markets from such adverse shocks. The findings of the paper there-fore suggest another important economic dimension and channel through which Italy may have been affected by EMU. Our analysis could also be potentially interesting for other countries with weak institutions considering adopting a currency based on stronger institutions. JEL Classification: F31, F33, G14.

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Paper provided by European Central Bank in its series Working Paper Series with number 1064.

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Length: 43 pages
Date of creation: Jun 2009
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Handle: RePEc:ecb:ecbwps:20091064

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Keywords: Euro; Italy; political economy; exchange rates; asset prices; financial markets; shocks.;

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