Yaya Sissoko

The Recent Experiences of Capital Flows and Fiscal Imbalances Since the Creation of the Eurozone

Abstract The objective of this chapter is to examine the recent experiences of capital flows and the associated fiscal imbalances since the inception of the Eurozone. We show that the standard explanation for understanding these fiscal imbalances and capital flows is viable, but is not complete given the unique circumstances surrounding these fiscal imbalances within the Eurozone. That is, the creation of the Eurozone provided some fiscal and monetary stability up until the shock of the 2008 Financial Crisis. After the 2008 Financial Crisis, the interaction between the current account and fiscal imbalances started to spread throughout the Eurozone members and many of these Eurozone members began to engage in policies in an attempt to restore stability and to stem capital outflows by implementing fiscal reforms. In fact, some of the Eurozone members attempted to restore their fiscal viability in response to the 2008 Financial Crisis, but not with much success. Thus, the Eurozone members, collectively, need to reexamine best practices to implement fiscal policies that are resistant to intense financial shocks. Empirically, we examined the following two hypotheses in this chapter via the Wald test statistic. The first hypothesis examined the effect of the own country fiscal imbalances within own country is uniform across all the Eurozone members. Then, the second hypothesis examined the fiscal imbalances of one Eurozone member do not have on other Eurozone members. The Wald test statistic rejected both hypotheses.