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Monetary Integration, Soft Budget Constraints, and the EMU Sovereign Debt Crises

  • Thushyanthan Baskaran

    ()

    (Department of Economics, University of Göttingen, Germany)

  • Zohal Hessami

    ()

    (Department of Economics, University of Konstanz, Germany)

One possible explanation for the European sovereign debt crises is that the European Economic and Monetary Union (EMU) gave rise to consolidation fatigue or even deliberate over-borrowing. This paper explores the validity of this explanation by studying how three decisive stages in the history of the EMU affected public borrowing in EU member states: the signing of the Maastricht treaty in 1992, the introduction of the Euro in 1999, and the suspension of the SGP in late 2003. The methodology relies on difference-in-difference regressions covering 26 OECD countries over the 1975-2009 period. The findings indicate that the first two 'treatments' reduced deficits especially in traditional high-deficit countries. In contrast, the watering down of the original SGP encouraged borrowing in countries which traditionally have had high deficits.

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Paper provided by Department of Economics, University of Konstanz in its series Working Paper Series of the Department of Economics, University of Konstanz with number 2013-03.

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Length: 31 pages
Date of creation: 14 Mar 2013
Date of revision:
Handle: RePEc:knz:dpteco:1303
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  1. Dell'Ariccia, Giovanni & Schnabel, Isabel & Zettelmeyer, Jeromin, 2006. "How Do Official Bailouts Affect the Risk of Investing in Emerging Markets?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1689-1714, October.
  2. Russell Cooper & Hubert Kempf & Dan Peled, 2005. "Is It Is or Is It Ain't My Obligation? Regional Debt in a Fiscal Federation," NBER Working Papers 11655, National Bureau of Economic Research, Inc.
  3. repec:ner:tilbur:urn:nbn:nl:ui:12-3125517 is not listed on IDEAS
  4. Schuknecht, Ludger & Moutot, Philippe & Rother, Philipp & Stark , Jürgen, 2011. "The Stability and Growth Pact - crisis and reform," Occasional Paper Series 129, European Central Bank.
  5. Jong-Wha Lee & Kwanho Shin, 2005. "IMF Bailouts and Moral Hazard," International Finance 0501005, EconWPA.
  6. Baskaran, Thushyanthan, 2012. "Soft budget constraints and strategic interactions in subnational borrowing: Evidence from the German States, 1975–2005," Journal of Urban Economics, Elsevier, vol. 71(1), pages 114-127.
  7. Charles Wyplosz, 2006. "European Monetary Union: the dark sides of a major success," Economic Policy, CEPR;CES;MSH, vol. 21(46), pages 207-261, 04.
  8. A. Colin Cameron & Jonah B. Gelbach & Douglas L. Miller, 2008. "Bootstrap-Based Improvements for Inference with Clustered Errors," The Review of Economics and Statistics, MIT Press, vol. 90(3), pages 414-427, August.
  9. Bertrand Candelon & Joan Muysken & Robert Vermeulen, 2010. "Fiscal policy and monetary integration in Europe: an update," Oxford Economic Papers, Oxford University Press, vol. 62(2), pages 323-349, April.
  10. Galí, Jordi & Perotti, Roberto, 2003. "Fiscal Policy and Monetary Integration in Europe," CEPR Discussion Papers 3933, C.E.P.R. Discussion Papers.
  11. Timothy Goodspeed, 2002. "Bailouts in a Federation," International Tax and Public Finance, Springer, vol. 9(4), pages 409-421, August.
  12. Kornai, Janos, 1986. "The Soft Budget Constraint," Kyklos, Wiley Blackwell, vol. 39(1), pages 3-30.
  13. Baskaran, Thushyanthan, 2009. "Did the Maastricht treaty matter for macroeconomic performance?," MPRA Paper 30106, University Library of Munich, Germany.
  14. Per Pettersson-Lidbom, 2010. "Dynamic Commitment and the Soft Budget Constraint: An Empirical Test," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 154-79, August.
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