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

Sebastian Lang and Wolfgang Schadner ()

Finance Research Letters, 2021, vol. 42, issue C

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.

Keywords: European Central Bank; Policy trilemma; Euro area; Free capital mobility; Monetary policy; Financial stability; Corona crisis (search for similar items in EconPapers)
JEL-codes: E52 E61 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:42:y:2021:i:c:s154461232100129x

DOI: 10.1016/j.frl.2021.102048

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