Political Credit Cycles: The Case of the Euro Zone

47 Pages Posted: 3 Apr 2013

See all articles by Jesús Fernández-Villaverde

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Luis Garicano

IE Business School; Centre for Economic Policy Research (CEPR)

Tano Santos

Columbia Business School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2013

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.

Keywords: bubbles, Euro crisis, Financial crisis, political economy

JEL Classification: D72, E0, G15

Suggested Citation

Fernández-Villaverde, Jesús and Garicano, Luis and Santos, Tano, Political Credit Cycles: The Case of the Euro Zone (March 2013). CEPR Discussion Paper No. DP9404. Available at SSRN: https://ssrn.com/abstract=2244084

Jesús Fernández-Villaverde (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Luis Garicano

IE Business School ( email )

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Centre for Economic Policy Research (CEPR)

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United Kingdom

Tano Santos

Columbia Business School ( email )

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United States
212-854-0489 (Phone)
212-316-9180 (Fax)

National Bureau of Economic Research (NBER)

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