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


  • Volbert Alexander


  • Peter Anker


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

Suggested Citation

  • Volbert Alexander & Peter Anker, 1997. "Fiscal Discipline and the Question of Convergence of National Interest Rates in the European Union," Open Economies Review, Springer, vol. 8(4), pages 335-352, October.
  • Handle: RePEc:kap:openec:v:8:y:1997:i:4:p:335-352
    DOI: 10.1023/A:1008234929142

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    References listed on IDEAS

    1. Favero, Carlo A & Giavazzi, Francesco & Spaventa, Luigi, 1997. "High Yields: The Spread on German Interest Rates," Economic Journal, Royal Economic Society, vol. 107(443), pages 956-985, July.
    2. Garcia, Rene & Perron, Pierre, 1996. "An Analysis of the Real Interest Rate under Regime Shifts," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 111-125, February.
    3. Alberto Alesina & Guido Tabellini, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 403-414.
    4. Buiter, W.H. & Corsetti, G. & Roubini, N., 1992. "Excessive Deficits: Sense and Nonsence in the Treaty of Maastricht," Papers 674, Yale - Economic Growth Center.
    5. Rose, Andrew K. & Svensson, Lars E. O., 1994. "European exchange rate credibility before the fall," European Economic Review, Elsevier, vol. 38(6), pages 1185-1216, June.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    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. Ermal Hitaj & Yasin Kursat Onder, 2013. "Fiscal Discipline in WAEMU; Rules, Institutions, and Markets," IMF Working Papers 13/216, International Monetary Fund.
    2. Iara, Anna & Wolff, Guntram B., 2014. "Rules and risk in the Euro area," European Journal of Political Economy, Elsevier, vol. 34(C), pages 222-236.
    3. Ondřej Schneider & Petr Hedbávný & Jan Zápal, 2007. "A Fiscal Rule that Has Teeth: A Suggestion for a “Fiscal Sustainability Council” Underpinned by the Financial Markets," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 1(1), pages 32-53, March.
    4. Alexander, Volbert & von Furstenberg, George M., 2000. "Monetary unions--a superior alternative to full dollarization in the long run," The North American Journal of Economics and Finance, Elsevier, vol. 11(2), pages 205-225, December.
    5. Clara Galliani & Stefano Zedda, 2015. "Will the Bail-in Break the Vicious Circle Between Banks and their Sovereign?," Computational Economics, Springer;Society for Computational Economics, vol. 45(4), pages 597-614, April.
    6. Petr Hedbávný & Ondrej Schneider & Jan Zápal, 2005. "A Fiscal Rule that has Teeth: A Suggestion for a ‘Fiscal Sustainability Council’ underpinned by the Financial Markets," CESifo Working Paper Series 1499, CESifo Group Munich.


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