Fiscal rules, financial stability and optimal currency areas

Paul De Grauwe and Pasquale Foresti

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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; (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 can reduce the capacity of national governments to deal with asymmetric shocks and can be incompatible with either free capital mobility and/or financial stability.

Keywords: fiscal policy rules; Eurozone; financial stability; policy objectives; optimal currency areas (search for similar items in EconPapers)
JEL-codes: E61 E62 F3 (search for similar items in EconPapers)
Date: 2016-08-01
New Economics Papers: this item is included in nep-mac and nep-opm
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Citations: View citations in EconPapers (5)

Published in Economics Letters, 1, August, 2016, 145(C), pp. 278-281. ISSN: 0165-1765

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http://eprints.lse.ac.uk/67404/ Open access version. (application/pdf)

Related works:
Journal Article: Fiscal rules, financial stability and optimal currency areas (2016)
Working Paper: Fiscal Rules, Financial Stability and Optimal Currency Areas (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:67404

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