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Fiscal Rules, Financial Stability and Optimal Currency Areas

Listed author(s):
  • Paul De Grauwe
  • Pasquale Foresti

In this paper we suggest that Eurozone countries face a policy trade-off among: 1) a common rule imposing co-movements in fiscal policy; 2) financial stability; and 3) financial integration. We provide empirical evidence documenting the existence of such a trade-off in the period characterized by the financial crisis and by the sovereign debt crisis. Then, we conclude that the intense fiscal rules that have been introduced in the Eurozone after the emergence of the debt crisis reduced the capacity of national governments to deal with asymmetric shocks and became incompatible with either free capital mobility and/or financial stability.

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File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp5390.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 5390.

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Date of creation: 2015
Handle: RePEc:ces:ceswps:_5390
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  1. Dani Rodrik, 2000. "How Far Will International Economic Integration Go?," Journal of Economic Perspectives, American Economic Association, vol. 14(1), pages 177-186, Winter.
  2. Joshua Aizenman & Menzie D. Chinn & Hiro Ito, 2008. "Assessing the Emerging Global Financial Architecture: Measuring the Trilemma's Configurations over Time," NBER Working Papers 14533, National Bureau of Economic Research, Inc.
  3. Michael Hutchison & Rajeswari Sengupta & Nirvikar Singh, 2012. "India’s Trilemma: Financial Liberalisation, Exchange Rates and Monetary Policy," The World Economy, Wiley Blackwell, vol. 35(1), pages 3-18, January.
  4. Gian Maria Milesi-Ferretti, & Philip R. Lane, 2003. "International Financial Integration," The Institute for International Integration Studies Discussion Paper Series iiisdp03, IIIS.
  5. Ito, Hiro & Kawai, Masahiro, 2014. "Determinants of the Trilemma Policy Combination," ADBI Working Papers 456, Asian Development Bank Institute.
  6. Jean Pisani-Ferry, 2012. "The Euro crisis and the new impossible trinity," Policy Contributions 674, Bruegel.
  7. De Grauwe, Paul, 2011. "Governance of a Fragile Eurozone," CEPS Papers 5523, Centre for European Policy Studies.
  8. Yu Hsing, 2012. "Impacts of the Trilemma Policies on Inflation, Growth and Volatility in Greece," International Journal of Economics and Financial Issues, Econjournals, vol. 2(3), pages 373-378.
  9. Schoenmaker, Dirk, 2011. "The financial trilemma," Economics Letters, Elsevier, vol. 111(1), pages 57-59, April.
  10. Paul De Grauwe & Yuemei Ji, 2013. "From Panic-Driven Austerity to Symmetric Macroeconomic Policies in the Eurozone," Journal of Common Market Studies, Wiley Blackwell, vol. 51, pages 31-41, September.
  11. Joshua Aizenman & Menzie David Chinn & Hiro Ito, 2013. "The “Impossible Trinity” Hypothesis in an Era of Global Imbalances: Measurement and Testing," Review of International Economics, Wiley Blackwell, vol. 21(3), pages 447-458, August.
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