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How the Euro Crisis Evolved and how to Avoid Another: EMU, Fiscal Policy and Credit Ratings

Listed author(s):
  • Polito, Vito
  • Wickens, Michael

This paper argues that the crisis was an outcome of EMU: setting a common monetary policy for countries with different initial inflation rates. The crisis countries were those with high inflation rates which then had negative real interest rates and consequently over-borrowed. Current policy discussions focus on crisis measures – fiscal, banking and political union – and not avoiding another crisis. This paper suggests two ways to avoid a future crisis: offset an inappropriate monetary policy using fiscal policy; markets could better price loan rates by taking into account default risk. The paper shows that neither was done prior to the crisis.

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File URL: http://www.sciencedirect.com/science/article/pii/S0164070413001493
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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 39 (2014)
Issue (Month): PB ()
Pages: 364-374

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Handle: RePEc:eee:jmacro:v:39:y:2014:i:pb:p:364-374
DOI: 10.1016/j.jmacro.2013.09.004
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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  1. repec:nbr:nberch:13342 is not listed on IDEAS
  2. Reichlin, Lucrezia, 2014. "Monetary Policy and Banks in the Euro Area: The Tale of Two Crises," Journal of Macroeconomics, Elsevier, vol. 39(PB), pages 387-400.
  3. Carneiro, Anabela & Portugal, Pedro & Varejão, José, 2014. "Catastrophic job Destruction during the Portuguese Economic Crisis," Journal of Macroeconomics, Elsevier, vol. 39(PB), pages 444-457.
  4. Davig, Troy & Leeper, Eric M. & Walker, Todd B., 2011. "Inflation and the fiscal limit," European Economic Review, Elsevier, vol. 55(1), pages 31-47, January.
  5. Vito Polito & Michael Wickens, 2011. "Assessing the fiscal stance in the European Union and the United States, 1970–2011," Economic Policy, CEPR;CES;MSH, vol. 26(68), pages 599-647, October.
  6. George Provopoulos, 2013. "The Greek Economy and Banking System: Recent Developments and the Way Forward," Special Conference Papers 14, Bank of Greece.
  7. International Monetary Fund, 2009. "The State of Public Finances Cross-Country Fiscal Monitor; November 2009," IMF Staff Position Notes 2009/25, International Monetary Fund.
  8. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
  9. Carneiro, Anabela & Portugal, Pedro & Varejão, José, 2013. "Catastrophic Job Destruction," IZA Discussion Papers 7670, Institute for the Study of Labor (IZA).
  10. Polito, Vito & Wickens, Michael R., 2013. "Is the UK triple-A?," CEPR Discussion Papers 9378, C.E.P.R. Discussion Papers.
  11. Polito, Vito & Wickens, Mike, 2014. "Modelling the U.S. sovereign credit rating," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 202-218.
  12. Gibson, Heather D. & Palivos, Theodore & Tavlas, George S., 2014. "The Crisis in the Euro Area: An Analytic Overview," Journal of Macroeconomics, Elsevier, vol. 39(PB), pages 233-239.
  13. Polito, Vito & Wickens, Michael, 2014. "How the Euro Crisis Evolved and how to Avoid Another: EMU, Fiscal Policy and Credit Ratings," Journal of Macroeconomics, Elsevier, vol. 39(PB), pages 364-374.
  14. Mike Wickens, 2010. "Is the Euro the Success that Everyone Seems to Think?," Open Economies Review, Springer, vol. 21(1), pages 183-185, February.
  15. Buti,Marco & Deroose,Servaas & Gaspar,Vitor & Martins,João Nogueira (ed.), 2010. "The Euro," Cambridge Books, Cambridge University Press, number 9789279098420, December.
  16. Polito, Vito & Wickens, Mike, 2012. "A model-based indicator of the fiscal stance," European Economic Review, Elsevier, vol. 56(3), pages 526-551.
  17. Carlo Cottarelli & José Vinãls, 2009. "A Strategy for Renormalizing Fiscal and Monetary Policies in Advanced Economies," IMF Staff Position Notes 2009/22, International Monetary Fund.
  18. Polito, Vito & Wickens, Michael, 2015. "Sovereign credit ratings in the European Union: A model-based fiscal analysis," European Economic Review, Elsevier, vol. 78(C), pages 220-247.
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