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Fiscal policies in monetary unions
- Why does the no bailout clause in the Maastricht Treaty lack credibility?
- Why is it that in a monetary union countries may have incentives to create excessive government deficits and debts?
- What is the implication for the dynamics of debt accumulation of a decline in the nominal growth rate of GDP? Assume that the nominal interest rate remains constant.
- Describe the main features of the Stability and Growth Pact, and discuss the recent reforms.
- Explain why in efficient capital markets there is no spillover of high debts and deficits created in one member country of the monetary union to other member countries.
- Under what conditions will these spillover effects reappear even if capital markets work efficiently?
- Explain why in a monetary union the default risk (credit risk) of government debt may increase.
- How has the financial crisis affected the interest rate spreads on government bonds in the Eurozone?
- What has the ECB done to reduce these spreads? Has the ECB been successful?
- Have financial markets correctly priced the risks in the government bond markets of the Eurozone?
- What are the objections to the issue of Eurobonds?
- Can the creation of a ‘safe asset’ in the Eurozone substitute for Eurobonds?