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The trilemma of expansionary monetary policy in the Euro area during the COVID-19 crisis

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  • Lang, Sebastian
  • Schadner, Wolfgang

Abstract

The economic crisis spurred by the Corona virus (COVID-19) confronts central banks worldwide with new kinds of challenges, as in many countries a stop in production and sales due to lock downs meets enormous fiscal and monetary impulses to overcome the crisis. In Europe the situation is more than ever complicated, as a multitude of monetary policy emergency measures implemented during the financial and European debt crisis of 2007 to 2012 are still in place, such as negative interest rates and central bank bond buying programs. Especially the bond buying programs have been intensified once more during the current Corona crisis. This article contributes to the existing knowledge by proposing a new theoretic trilemma model for the case of a monetary union. Accordingly, there exists a trade-off between stabilizing a monetary union, maintaining free capital mobility and reducing expansionary monetary policy. The results underscore the importance of resolving the trilemma without jeopardizing the currency and financial stability.

Suggested Citation

  • Lang, Sebastian & Schadner, Wolfgang, 2021. "The trilemma of expansionary monetary policy in the Euro area during the COVID-19 crisis," Finance Research Letters, Elsevier, vol. 42(C).
    • Handle: RePEc:eee:finlet:v:42:y:2021:i:c:s154461232100129x
    DOI: 10.1016/j.frl.2021.102048
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    References listed on IDEAS

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    Cited by:

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    2. Baihua Yuan & Wang Leiling & Hayot Berk Saydaliev & Vishal Dagar & Ángel Acevedo-Duque, 2022. "Testing the impact of fiscal policies for economic recovery: does monetary policy act as catalytic tool for economic Survival," Economic Change and Restructuring, Springer, vol. 55(4), pages 2215-2235, November.
    3. Iyer, Subramanian Rama & Simkins, Betty J., 2022. "COVID-19 and the Economy: Summary of research and future directions," Finance Research Letters, Elsevier, vol. 47(PB).

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    More about this item

    Keywords

    European Central Bank; Policy trilemma; Euro area; Free capital mobility; Monetary policy; Financial stability; Corona crisis;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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