Working Paper: CEPR ID: DP1505
Authors: Andrew J. Hughes Hallett; Peter McAdam
Abstract: This paper analyses four popular themes in the debate about the transition to monetary union: (a) fiscal discipline creating gains in credibility; (b) there being perceptible risk of a bail out for the highly indebted countries; (c) budgets being successfully cut to the required 3% limit in conditions of low growth and low inflation; and (d) the convergence criteria actually being mutually consistent. The usual accounting identities show the first two effects are likely to be small or non-existent, whereas the second two are unlikely to be satisfied.
Keywords: convergence criteria; debt and deficit ratios; credibility; fiscal sustainability
JEL Codes: E63; F15; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fall in nominal interest rates (E43) | credibility dividend (G12) |
| fall in inflation (E31) | credibility dividend (G12) |
| market expectations of fiscal sustainability (H68) | monetary policy (E52) |
| lack of fiscal discipline (E62) | monetary credibility (E42) |
| satisfying one Maastricht criterion (F55) | satisfaction of others (D10) |
| unsustainable fiscal position (H69) | sustainable fiscal position upon joining single currency (F36) |
| significant reductions in interest rates (E43) | sustainable fiscal position upon joining single currency (F36) |
| stable inflation rates (E31) | sustainable fiscal position upon joining single currency (F36) |