Discussion Paper Details

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Title: Political Credit Cycles: The Case of the Euro Zone

Author(s): Jesús Fernández-Villaverde, Luis Garicano and Tano Santos

Publication Date: March 2013

Keyword(s): bubbles, Euro crisis, Financial crisis and political economy

Programme Area(s): International Macroeconomics and Public Economics

Abstract: We study the mechanisms through which the adoption of the Euro delayed, rather than advanced, economic reforms in the Euro zone periphery and led to the deterioration of important institutions in these countries. We show that the abandonment of the reform process and the institutional deterioration, in turn, not only reduced their growth prospects but also fed back into financial conditions, prolonging the credit boom and delaying the response to the bubble when the speculative nature of the cycle was already evident. We analyze empirically the interrelation between the financial boom and the reform process in Greece, Spain, Ireland, and Portugal and, by way of contrast, in Germany, a country that did experience a reform process after the creation of the Euro.

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Bibliographic Reference

Fernández-Villaverde, J, Garicano, L and Santos, T. 2013. 'Political Credit Cycles: The Case of the Euro Zone'. London, Centre for Economic Policy Research.