Fiscal Discipline and the Question of Convergence of National Interest Rates in the European Union
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 â€œmarket-discipline hypothesisâ€ 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
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