Minor Nuisance Around Foreign Exchange Markets - Lessons from the Stability and Growth Pact Debate
AbstractThis paper studies the impact of political events that systematically undermined the Stability and Growth Pact (SGP) on the euro's foreign exchange expectation bias for the period 2001 to 2005. Our findings suggest that euro foreign exchange markets were attentive to the political dispute over the enforcement of the SGP's rules. The results indicate that foreign exchange markets anticipated the gradual demise of the SGP. 1) For the expectation bias in euro foreign exchange markets we do not find systematic level effects. 2) Since volatility decreases following "destabilising" political events, we conclude that already in the early years of the SGP regime the demise of the original Pact was anticipated by foreign exchange market participants. The conclusion is that a politicised multilateral fiscal rule does not improve market discipline, which could be a crucial argument against the new "European Fiscal Compact".
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Bibliographic InfoPaper provided by Friedrich-Schiller-University Jena in its series Global Financial Markets Working Paper Series with number 2012-32.
Date of creation: 2012
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fiscal rules; market discipline; FX markets; GARCH;
Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-06 (All new papers)
- NEP-EEC-2012-12-06 (European Economics)
- NEP-MAC-2012-12-06 (Macroeconomics)
- NEP-POL-2012-12-06 (Positive Political Economics)
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