Political Credit Cycles: The Case of the Euro Zone

45 Pages Posted: 22 Mar 2013 Last revised: 20 Feb 2023

See all articles by Jesús Fernández-Villaverde

Jesús Fernández-Villaverde

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

Luis Garicano

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

Tano Santos

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

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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.

Suggested Citation

Fernández-Villaverde, Jesús and Garicano, Luis and Garicano, Luis and Santos, Tano, Political Credit Cycles: The Case of the Euro Zone (March 2013). NBER Working Paper No. w18899, Available at SSRN: https://ssrn.com/abstract=2237812

Jesús Fernández-Villaverde (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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Luis Garicano

IE Business School ( email )

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Tano Santos

Columbia Business School ( email )

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