The Stability and Growth Pact (SGP) aims at reducing the deficit bias and inducing fiscal policy co-ordination in EMU. This article shows that, under positive (demand or supply) shocks, average deficits and interest rates with fiscal co-ordination can be higher than without co-ordination, thus making two of the aims of the SGP incompatible. Copyright 2005 Blackwell Publishing Ltd.
The Stability and Growth Pact (SGP) was established to govern discretionary fiscal policy in the European Monetary Union. This article studies the effects created when there is uncertainty about the members' commitment to respecting the established deficit limits in the SGP. We will show that, even if countries respect the SGP deficit ceiling, the presence of uncertainty about their compliance will bring about higher volatility in key economic variables, which could, in turn, affect unemployment and growth negatively. This finding shows that it is important to reduce uncertainty about the members' commitment towards the SGP.
The analysis of market efficiency in the foreign exchange market adopted a new approach after Granger (Oxford Bulletin of Economics and Statistics, 48(3), 1986) stated that assets in an efficient market could not be cointegrated. If they were, there would be a market inefficiency since there would be Granger causality running at least in one direction and thus one price could be used to forecast the other. The interpretation that the literature has given to the relationship between cointegration and market efficiency has been that noncointegration is a necessary and sufficient condition for market efficiency. In the authors' opinion, the fact that two spot exchange rates are cointegrated does not necessarily imply that inefficiency exists. In this article, it is argued that when the economy is composed of N exchange rates and the closed system is analysed without dynamics, as it is the case when considering the no-arbitrage condition, the Granger Representation Theorem (GRT) does not tell one anything about efficiency. Further, when a subset J of the N exchange rates is considered, then the GRT becomes irrelevant for efficiency. To illustrate these hypotheses will be the objective of this article along with that of developing a framework to test for efficiency when cointegration is present.
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