How the Euro Crisis Evolved and how to Avoid Another: EMU, Fiscal Policy and Credit Ratings

Vito Polito and Michael Wickens

Journal of Macroeconomics, 2014, vol. 39, issue PB, 364-374

Abstract: This paper argues that the crisis was an outcome of EMU: setting a common monetary policy for countries with different initial inflation rates. The crisis countries were those with high inflation rates which then had negative real interest rates and consequently over-borrowed. Current policy discussions focus on crisis measures – fiscal, banking and political union – and not avoiding another crisis. This paper suggests two ways to avoid a future crisis: offset an inappropriate monetary policy using fiscal policy; markets could better price loan rates by taking into account default risk. The paper shows that neither was done prior to the crisis.

Keywords: Fiscal union; Monetary and fiscal policy; Credit ratings; Default risk (search for similar items in EconPapers)
JEL-codes: E52 E62 H63 H68 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (9)

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Working Paper: How the euro crisis evolved and how to avoid another: EMU, fiscal policy and credit ratings (2013)
Working Paper: How the Euro Crisis Evolved and How to Avoid Another: EMU, Fiscal Policy and Credit Ratings (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:39:y:2014:i:pb:p:364-374

DOI: 10.1016/j.jmacro.2013.09.004

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