Government responsiveness in times of internal devaluationHints at a crisis of representation in eurozone?

Abstract

The research objective of this paper is to find out the best predictor of internal devaluation measures imposed by governmental decision. There are two competing hypotheses. On the one hand, political instability may affect the implementation of internal devaluation due to opportunistic behavior and strategic thinking from the parties in power. On the other hand, governments also respond in real time to the signals from the financial markets with respect to the necessity of such measures. To accommodate for the contrasting hypotheses, we employ a panel dataset (2007-2017 Eurozone countries) with a fixed-effects model where the expected time in office of each cabinet (previously estimated using survival analysis) and the bond yields paid to issue public debt into financial markets, are explanatory variables. After controlling for other effects, the results show that expected time has no significant effect, while the yields do, something that might hint at a crisis of representation.