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Southern Europe's Institutional Decline

Author

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  • Ignacio Lopez, Jose

  • Mengus, Eric

  • Challe, Edouard

Abstract

The run up to the euro currency initiated a period of capital inflows into southern European countries, i.e., Spain, Portugal, Italy and Greece. We document that those countries, and only them among OECD countries, concomitantly experienced a decline in the quality of their institutions. We confirm the joint pattern of capital inflows and institutional decline in a large panel of countries. We show theoretically that this joint pattern naturally follows from a "soft budget constraint" syndrome wherein persistently cheap external funding undermines incentives to maintain good institutions - understood here as the degree of government commitment not to support inefficient firms. Low institutional quality ultimately raises the share of inefficient firms, which lowers average productivity and raises productivity dispersion across firms - the typical pattern of productivity in southern Europe over the period under consideration.

Suggested Citation

  • Ignacio Lopez, Jose & Mengus, Eric & Challe, Edouard, 2016. "Southern Europe's Institutional Decline," HEC Research Papers Series 1148, HEC Paris.
    • Handle: RePEc:ebg:heccah:1148
    DOI: 10.2139/ssrn.2792621
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    Cited by:

    1. Thibault Libert, 2017. "Misallocation Before, During and After the Great Recession," Working papers 658, Banque de France.
    2. Alberto Bagnai & Christian Alexander Mongeau Ospina, 2018. "Monetary integration vs. real disintegration: single currency and productivity divergence in the euro area," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 21(4), pages 353-367, October.
    3. Ivan Jaccard & Frank Smets, 2020. "Structural Asymmetries and Financial Imbalances in the Eurozone," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 36, pages 73-102, April.
    4. Cette, Gilbert & Fernald, John & Mojon, Benoît, 2016. "The pre-Great Recession slowdown in productivity," European Economic Review, Elsevier, vol. 88(C), pages 3-20.
    5. Beyaert, Arielle & García-Solanes, José & Lopez-Gomez, Laura, 2019. "Do institutions of the euro area converge?," Economic Systems, Elsevier, vol. 43(3).

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    JEL classification:

    • A10 - General Economics and Teaching - - General Economics - - - General

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