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This paper explores the interrelations between budget deficits and structural reforms in a monetary union. The analysis considers the international spillovers generated by both policies. We show that efforts to achieve fiscal policy coordination within the Eurozone reduce member countries' incentives to carry out much-needed structural reforms. As a consequence, this cooperation can turn out to be welfare-reducing if it is not extended to the implementation of structural reforms.
Keywords: structural reforms; budget deficits; externalities; coordination
Published Online: 2010-7-8
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston