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Austerity and credibility in the Eurozone
McMenamin, Iain; Breen, Michael; Portillo, Juan Munoz
During the euro crisis policy-makers tried to re-establish credibility with austere budgets. Studies of austerity have been plagued by measurement and endogeneity problems. We provide a direct test of the effect of austerity on confidence by calculating the immediate impact of austere budgets on government bonds. We build a unique database of budget dates and conduct event studies of 223 (future) Eurozone budgets. Since austere budgets are enacted in particular circumstances, we use a treatment effects design to measure markets’ responses. Our findings are discouraging for the argument that austerity can provide a positive credibility shock. Markets do not welcome austerity. On the contrary, austere budgets are associated with substantial interest rate increases. These results underline how constrained governments are in debt crises.
Keyword(s): Political science; Austerity; Budgets; Comparative political economy; Debt; Eurozone
Publication Date:
2015
Type: Other
Peer-Reviewed: Unknown
Language(s): English
Institution: Dublin City University
Citation(s): McMenamin, Iain ORCID: 0000-0002-1704-390X <https://orcid.org/0000-0002-1704-390X>, Breen, Michael ORCID: 0000-0002-5857-9938 <https://orcid.org/0000-0002-5857-9938> and Portillo, Juan Munoz (2015) Austerity and credibility in the Eurozone. European Union Politics, 16 (1). pp. 45-66. ISSN 1741-2757
Publisher(s): SAGE Publications
File Format(s): application/pdf
Related Link(s): http://doras.dcu.ie/20342/2/Austerity_EUP_Blind_R2_RG_final.pdf,
http://dx.doi.org/10.1177/1465116514553487
First Indexed: 2015-02-28 05:40:25 Last Updated: 2019-02-09 06:24:26