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Is there a trade-off between free capital mobility, financial stability and fiscal policy flexibility in the EMU?

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  • Canale, Rosaria Rita
  • de Grauwe, Paul
  • Foresti, Pasquale
  • Napolitano, Oreste

Abstract

The recent dynamics characterizing the Eurozone economy suggest the existence of a new policy trilemma faced by its member countries. According to this policy trilemma, there is a trade-off between free capital mobility, financial stability and fiscal policy flexibility. In this paper, we analyze the foundations of such a trade-off and, based on the data for 11 Eurozone countries, present an empirical investigation on the existence of the trilemma. The results highlight the existence of the trade-off, with some differences between member countries. The existence of this trilemma in the Eurozone provides arguments for implementing centralized financial supervision together with fiscal and monetary reforms that should strengthen the currency union.

Suggested Citation

  • Canale, Rosaria Rita & de Grauwe, Paul & Foresti, Pasquale & Napolitano, Oreste, 2018. "Is there a trade-off between free capital mobility, financial stability and fiscal policy flexibility in the EMU?," LSE Research Online Documents on Economics 86629, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:86629
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    Cited by:

    1. Canale, Rosaria Rita & De Simone, Elina & Spagnolo, Nicola, 2021. "Financial markets and fiscal discipline in the Eurozone," Structural Change and Economic Dynamics, Elsevier, vol. 58(C), pages 490-499.
    2. Dobronravova, E. & Trunin, P., 2024. "International monetary policy transmission in EAEU countries," Journal of the New Economic Association, New Economic Association, vol. 62(1), pages 219-228.
    3. Rosaria Rita Canale & Giorgio Liotti, 2022. "Absolute Poverty and Sound Public Finance in the Eurozone," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 20(2), pages 327-344, June.
    4. Meixing Dai & Moïse Sidiropoulos, 2018. "Les trilemmes de la zone euro," Bulletin de l'Observatoire des politiques économiques en Europe, Observatoire des Politiques Économiques en Europe (OPEE), vol. 38(1), pages 27-34, June.
    5. Iwanicz-Drozdowska Małgorzata & Kurowski Łukasz, 2021. "Keep your friends close and your enemies closer – the case of monetary policy and financial imbalances," German Economic Review, De Gruyter, vol. 22(4), pages 383-414, November.
    6. 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).

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    More about this item

    Keywords

    EMU; policy trilemma; Eurozone; free capital mobility; fiscal policy; financial stability; financial crisis;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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