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Euro Area Membership and the Probability of a Sudden Stop: An Empirical Assessment

Miguel de Freitas (), Luis Nunes () and Madalena Sampaio Rodrigues

Journal of Common Market Studies, 2018, vol. 56, issue 4, 818-836

Abstract: Using quarterly data from 1995 until 2014, we investigate whether Euro Area (EA) membership influences the probability of a European Union Member State going through an episode of sudden stop or through an episode of bonanza, after controlling for a number of push and pull factors. Overall, our results do not support the claim that EA membership constituted a weakness during the recent financial crisis. On the contrary, we find that EA membership decreases the probability of a sudden stop, all else equal. We find no evidence that being part of the EA has a direct effect on the probability of bonanza. When allowing for interaction effects, our results suggest that EA membership might have mitigated the risk perception arising from higher government debt in the case of bonanzas.

Date: 2018
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