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A simple prudential-effort foundation for the financial trilemma

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  • Nolan, Charles

Abstract

The “financial trilemma” asserts that deep financial integration, purely national financial policies and financial stability cannot simultaneously be achieved. Existing formalisations employing ex post burden-sharing games imply the trilemma result hinges on equilibrium selection. We develop a minimal ex ante prudential-effort model where financial integration amplifies cross-border crisis risk and national regulators internalise only part of global losses. The unique symmetric Nash equilibrium underprovides prudential effort and cannot deliver first-best stability when both integration and national policy autonomy are high. That provides a unique-equilibrium foundation for the financial trilemma and clarifies when supranational prudential arrangements are needed.

Suggested Citation

  • Nolan, Charles, 2026. "A simple prudential-effort foundation for the financial trilemma," Economics Letters, Elsevier, vol. 262(C).
    • Handle: RePEc:eee:ecolet:v:262:y:2026:i:c:s016517652600073x
    DOI: 10.1016/j.econlet.2026.112879
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    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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