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

  • Pedro Bação


    (Faculdade de Economia Universidade de Coimbra / GEMF)

  • António Portugal Duarte


    (Faculdade de Economia Universidade de Coimbra / GEMF)

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.

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Paper provided by GEMF - Faculdade de Economia, Universidade de Coimbra in its series GEMF Working Papers with number 2011-04.

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Length: 21 pages
Date of creation: Dec 2010
Date of revision:
Handle: RePEc:gmf:wpaper:2011-04
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  1. Gabriel Fagan & Vítor Gaspar, 2007. "Adjusting to the Euro," Working Papers w200703, Banco de Portugal, Economics and Research Department.
  2. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  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. Fernando Alexandre & Pedro Bação & João Cerejeira & Miguel Portela, 2009. "Employment and exchange rates: the role of openness and technology," NIPE Working Papers 16/2009, NIPE - Universidade do Minho.
  5. Carlos Marinheiro, 2006. "The sustainability of Portuguese fiscal policy from a historical perspective," Empirica, Springer, vol. 33(2), pages 155-179, June.
  6. Alan Ahearne & Jean Pisani-Ferry, 2006. "The Euro: only for the agile," Policy Briefs 42, Bruegel.
  7. António Portugal Duarte, 2005. "The Portuguese Disinflation Process: Analysis of Some Costs and Benefits," International Finance 0504005, EconWPA.
  8. Gérard Oudiz & Jacques Mélitz & Daniel Cohen, 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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