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Accession to the European Union, Interest Rates and Indebtedness: Greece and Portugal

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  • Pedro Bação

    ()
    (Faculdade de Economia Universidade de Coimbra / GEMF)

  • António Portugal Duarte

    ()
    (Faculdade de Economia Universidade de Coimbra / GEMF)

Abstract

The increase in both public and private indebtedness has been one of the main macroeconomic developments in recent years. This trend has been accompanied by large current account deficits, especially in smaller countries, such as Greece and Portugal. One possible explanation for this behaviour is the reduction in interest rates that convergence to the European single currency produced. At the same time as interest rates declined, these countries experienced a strong increase in domestic demand and a real exchange rate appreciation. Adoption of the euro implied that the appreciation of the real exchange rate could not be compensated by means of nominal devaluations, resulting in reduced competitiveness. In this paper we study the macroeconomic performance of Greece and Portugal during the process of convergence to the single currency and their prospects, in the light of the current financial crisis. To this end we make use of a consumption model developed by Gabriel Fagan and Vítor Gaspar. The experience of these two countries may give important lessons for candidate countries.

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Bibliographic Info

Paper provided by GEMF - Faculdade de Economia, Universidade de Coimbra in its series GEMF Working Papers with number 2011-04.

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Length: 21 pages
Date of creation: Dec 2010
Date of revision:
Handle: RePEc:gmf:wpaper:2011-04

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Keywords: consumption; euro; interest rates; indebtedness; exchange rates;

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References

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  1. António Duarte, 2009. "The Portuguese Disinflation Process: Analysis of Some Costs and Benefits," Transition Studies Review, Springer, vol. 16(1), pages 157-173, May.
  2. Carlos Marinheiro, 2006. "The sustainability of Portuguese fiscal policy from a historical perspective," Empirica, Springer, vol. 33(2), pages 155-179, June.
  3. Alan Ahearne & Jean Pisani-Ferry, 2006. "The Euro: only for the agile," Policy Briefs 42, Bruegel.
  4. Fernando Alexandre & Pedro Bação & João Cerejeira & Miguel Portela, 2011. "Employment and Exchange Rates: The Role of Openness and Technology," Open Economies Review, Springer, vol. 22(5), pages 969-984, November.
  5. Gabriel Fagan & Vítor Gaspar, 2007. "Adjusting to the Euro," Working Papers w200703, Banco de Portugal, Economics and Research Department.
  6. Gérard Oudiz & Jacques Mélitz & Daniel Cohen, 1988. "Le système monétaire européen et l'asymétrie franc-mark," Revue Économique, Programme National Persée, vol. 39(3), pages 667-678.
  7. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  8. Vítor Gaspar & Ildeberta Abreu, 1999. "Price Stability and Intermediate Targets for Monetary Policy," Working Papers w199901, Banco de Portugal, Economics and Research Department.
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Cited by:
  1. Pedro BAÇÃO & António Portugal DUARTE & Mariana SIMÕES, 2013. "The International Monetary System in Flux: Overview and Prospects," Chapters of Financial Aspects of Recent Trends in the Global Economy book, in: Rajmund Mirdala (ed.), Financial Aspects of Recent Trends in the Global Economy, volume 1, chapter 10, pages 192-206 ASERS Publishing.
  2. Pedro Bação & João Maia Domingues & António Portugal Duarte, 2012. "Financial Crisis and Domino Effect," Book Chapters, Institute of Economic Sciences.
  3. João Sousa Andrade & Adelaide Duarte, 2011. "The Fundamentals of the Portuguese Crisis," GEMF Working Papers 2011-16, GEMF - Faculdade de Economia, Universidade de Coimbra.

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