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Fiscal rules, financial stability and optimal currency areas

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  • De Grauwe, Paul
  • Foresti, Pasquale

Abstract

In this paper we suggest that Eurozone countries face a policy trade-off between: (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.

Suggested Citation

  • De Grauwe, Paul & Foresti, Pasquale, 2016. "Fiscal rules, financial stability and optimal currency areas," Economics Letters, Elsevier, vol. 145(C), pages 278-281.
    • Handle: RePEc:eee:ecolet:v:145:y:2016:i:c:p:278-281
    DOI: 10.1016/j.econlet.2016.07.010
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    1. 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.
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    5. Hiro Ito & Masahiro Kawai, 2014. "Determinants of the Trilemma Policy Combination," Macroeconomics Working Papers 23967, East Asian Bureau of Economic Research.
    6. 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.
    7. Schoenmaker, Dirk, 2011. "The financial trilemma," Economics Letters, Elsevier, vol. 111(1), pages 57-59, April.
    8. 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.
    9. 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.
    10. Dani Rodrik, 2000. "How Far Will International Economic Integration Go?," Journal of Economic Perspectives, American Economic Association, vol. 14(1), pages 177-186, Winter.
    11. 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.
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    Cited by:

    1. Amélie BARBIER-GAUCHARD, 2020. "Blueprint for the European Fiscal Union: State of knowledge and Challenges," Working Papers of BETA 2020-39, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    2. Dr Waldemar Szymanski & Dr Monika Szczerbak & Dr Malgorzata Ozieblo, 2023. "Crisis Averted: Navigating Fiscal Policy Instruments in Member States on the Example of the Covid-19 Pandemic," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 556-569.
    3. Capasso, Salvatore & Foresti, Pasquale, 2024. "Monetary-fiscal policies design and financial shocks in currency unions," LSE Research Online Documents on Economics 124371, London School of Economics and Political Science, LSE Library.
    4. Pasquale Foresti, 2018. "Monetary And Fiscal Policies Interaction In Monetary Unions," Journal of Economic Surveys, Wiley Blackwell, vol. 32(1), pages 226-248, February.
    5. Salvatore Capasso & Pasquale Foresti, 2024. "Monetary-fiscal policies design and financial shocks in currency unions," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 41(2), pages 439-455, July.
    6. Simona Hašková & Marek Vochozka, 2018. "Duality in Cyclical Trends in European Union Confirmed," SAGE Open, , vol. 8(1), pages 21582440177, January.
    7. Postuła Marta & Klepacki Jarosław & Alińska Agnieszka, 2018. "The Impact of Standardised fiscal rules index on the Yield on Ten-Year Government Bonds in the Visegrád Group Countries in 2005–2016," Journal of Management and Business Administration. Central Europe, Sciendo, vol. 26(3), pages 49-70, September.
    8. Eslamloueyan, Karim & Fatemifar, Neda, 2021. "Does deeper financial integration lead to macroeconomic and financial instability in Asia?," Economic Analysis and Policy, Elsevier, vol. 70(C), pages 437-451.
    9. Meier, Samira & Rodriguez Gonzalez, Miguel & Kunze, Frederik, 2021. "The global financial crisis, the EMU sovereign debt crisis and international financial regulation: lessons from a systematic literature review," International Review of Law and Economics, Elsevier, vol. 65(C).

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    More about this item

    Keywords

    Fiscal policy rules; Eurozone; Financial stability; Policy objectives; Optimal Currency Areas;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F3 - International Economics - - International Finance

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