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Accession to the European Union, Interest Rates and Indebtedness: Greece and Portugal

Author

Listed:
  • Pedro Bação

    () (Faculdade de Economia Universidade de Coimbra / GEMF)

  • António Portugal Duarte

    () (Faculdade de Economia Universidade de Coimbra / GEMF)

Abstract

The increase in both public and private indebtedness has been one of the main macroeconomic developments in recent years. This trend has been accompanied by large current account deficits, especially in smaller countries, such as Greece and Portugal. One possible explanation for this behaviour is the reduction in interest rates that convergence to the European single currency produced. At the same time as interest rates declined, these countries experienced a strong increase in domestic demand and a real exchange rate appreciation. Adoption of the euro implied that the appreciation of the real exchange rate could not be compensated by means of nominal devaluations, resulting in reduced competitiveness. In this paper we study the macroeconomic performance of Greece and Portugal during the process of convergence to the single currency and their prospects, in the light of the current financial crisis. To this end we make use of a consumption model developed by Gabriel Fagan and Vítor Gaspar. The experience of these two countries may give important lessons for candidate countries.

Suggested Citation

  • Pedro Bação & António Portugal Duarte, 2010. "Accession to the European Union, Interest Rates and Indebtedness: Greece and Portugal," GEMF Working Papers 2011-04, GEMF, Faculty of Economics, University of Coimbra.
  • Handle: RePEc:gmf:wpaper:2011-04
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    References listed on IDEAS

    as
    1. Carlos Marinheiro, 2006. "The sustainability of Portuguese fiscal policy from a historical perspective," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 33(2), pages 155-179, June.
    2. Fernando Alexandre & Pedro Bação & João Cerejeira & Miguel Portela, 2011. "Employment and Exchange Rates: The Role of Openness and Technology," Open Economies Review, Springer, pages 969-984.
    3. Vítor Gaspar & Ildeberta Abreu, 1999. "Price Stability and Intermediate Targets for Monetary Policy," Working Papers w199901, Banco de Portugal, Economics and Research Department.
    4. Alan Ahearne & Jean Pisani-Ferry, 2006. "The Euro: only for the agile," Policy Briefs 42, Bruegel.
    5. Fagan, Gabriel & Gaspar, Ví­tor, 2007. "Adjusting to the euro," Working Paper Series 716, European Central Bank.
    6. António Duarte, 2009. "The Portuguese Disinflation Process: Analysis of Some Costs and Benefits," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 16(1), pages 157-173, May.
    7. Gabriel Fagan & Vítor Gaspar, 2007. "Adjusting to the Euro," Working Papers w200703, Banco de Portugal, Economics and Research Department.
    8. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
    9. Daniel Cohen & Jacques Mélitz & Gérard Oudiz, 1988. "Le système monétaire européen et l'asymétrie franc-mark," Revue Économique, Programme National Persée, vol. 39(3), pages 667-678.
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    Cited by:

    1. Pedro Bação & João Maia Domingues & António Portugal Duarte, 2012. "Financial Crisis and Domino Effect," Book Chapters, Institute of Economic Sciences.
    2. João Sousa Andrade & Adelaide Duarte, 2011. "The Fundamentals of the Portuguese Crisis," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, pages 195-218.
    3. Pedro Bação & António Portugal Durate & Mariana Simões, 2013. "The International Monetary System in Flux: Overview and Prospects," GEMF Working Papers 2013-07, GEMF, Faculty of Economics, University of Coimbra.
    4. Bjørndal, Trond & Lappo, Alena & Ramos, Jorge, 2015. "An economic analysis of the Portuguese fisheries sector 1960–2011," Marine Policy, Elsevier, vol. 51(C), pages 21-30.

    More about this item

    Keywords

    consumption; euro; interest rates; indebtedness; exchange rates;

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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