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Single currency and fiscal performance: the early Euro Area in perspective

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  • João Tovar Jalles
  • Carlos Mulas-Granados
  • José Tavares
  • Carolina Correa Caro

Abstract

We examine how exchange rate regimes affect fiscal discipline by investigating European countries as they transitioned from flexible to fully fixed exchange rates under the Euro. We apply the synthetic control method to estimate, for each Eurozone country, its counterfactual budget stance under flexible rates. Our evidence strongly suggests that fixing exchange rates negatively impacted negatively fiscal discipline. However, effects were not homogeneous, as they were mediated by political factors. For example, countries where policymakers faced a longer political horizon and operated within a more cohesive political environment, managed to perform better in terms of fiscal discipline.

Suggested Citation

  • João Tovar Jalles & Carlos Mulas-Granados & José Tavares & Carolina Correa Caro, 2018. "Single currency and fiscal performance: the early Euro Area in perspective," Applied Economics Letters, Taylor & Francis Journals, vol. 25(6), pages 415-419, March.
    • Handle: RePEc:taf:apeclt:v:25:y:2018:i:6:p:415-419
    DOI: 10.1080/13504851.2017.1327119
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    Cited by:

    1. Florence Bouvet & Roy Bower & Jason C. Jones, 2022. "Currency Devaluation as a Source of Growth in Africa: A Synthetic Control Approach," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 48(3), pages 367-389, June.
    2. Hong Zhuang & Miao Grace Wang & Imre Ersoy & Mesut Eren, 2023. "Does joining the European monetary union improve labor productivity? A synthetic control approach," Journal of Productivity Analysis, Springer, vol. 59(3), pages 287-306, June.

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