Chapter 11 Essay questions

  1. Why does the no bailout clause in the Maastricht Treaty lack credibility?
  2. Why is it that in a monetary union countries may have incentives to create excessive government deficits and debts?
  3. 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.
  4. Describe the main features of the Stability and Growth Pact, and discuss the recent reforms.
  5. 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.
  6. Under what conditions will these spillover effects reappear even if capital markets work efficiently?
  7. Explain why in a monetary union the default risk (credit risk) of government debt may increase.
  8. How has the financial crisis affected the interest rate spreads on government bonds in the Eurozone?
  9. What has the ECB done to reduce these spreads? Has the ECB been successful?
  10. Have financial markets correctly priced the risks in the government bond markets of the Eurozone?
  11. What are the objections to the issue of Eurobonds?
  12. Can the creation of a ‘safe asset’ in the Eurozone substitute for Eurobonds?
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