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Minor Nuisance Around Foreign Exchange Markets - Lessons from the Stability and Growth Pact Debate


  • Matthias Bauer

    (Graduate Programme "Global Financial Markets")

  • Martin Zenker

    (Graduate Programme "Soziale Marktwirtschaft")


This paper studies the impact of political events that systematically undermined the Stability and Growth Pact (SGP) on the euro's foreign exchange expectation bias for the period 2001 to 2005. Our findings suggest that euro foreign exchange markets were attentive to the political dispute over the enforcement of the SGP's rules. The results indicate that foreign exchange markets anticipated the gradual demise of the SGP. 1) For the expectation bias in euro foreign exchange markets we do not find systematic level effects. 2) Since volatility decreases following "destabilising" political events, we conclude that already in the early years of the SGP regime the demise of the original Pact was anticipated by foreign exchange market participants. The conclusion is that a politicised multilateral fiscal rule does not improve market discipline, which could be a crucial argument against the new "European Fiscal Compact".

Suggested Citation

  • Matthias Bauer & Martin Zenker, 2012. "Minor Nuisance Around Foreign Exchange Markets - Lessons from the Stability and Growth Pact Debate," Global Financial Markets Working Paper Series 2012-32, Friedrich-Schiller-University Jena.
  • Handle: RePEc:hlj:hljwrp:32-2012

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    References listed on IDEAS

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    More about this item


    fiscal rules; market discipline; FX markets; GARCH;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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