Journal of Economic Perspectives: Vol. 27 No. 3 (Summer 2013)


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Political Credit Cycles: The Case of the Eurozone

Article Citation

Fernández-Villaverde, Jesús, Luis Garicano, and Tano Santos. 2013. "Political Credit Cycles: The Case of the Eurozone." Journal of Economic Perspectives, 27(3): 145-66.

DOI: 10.1257/jep.27.3.145


We study the mechanisms through which the entry into the euro delayed, rather than advanced, key economic reforms in the eurozone 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.

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Fernández-Villaverde, Jesús (U PA)
Garicano, Luis (London School of Economics and Political Science)
Santos, Tano (Columbia U)

JEL Classifications

D02: Institutions: Design, Formation, and Operations
D72: Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
E44: Financial Markets and the Macroeconomy
F33: International Monetary Arrangements and Institutions
F36: Financial Aspects of Economic Integration


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