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

Rosaria Rita Canale (), Paul Grauwe (), Pasquale Foresti () and Oreste Napolitano ()
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Paul Grauwe: The London School of Economics and Political Science

Review of World Economics (Weltwirtschaftliches Archiv), 2018, vol. 154, issue 1, 177-201

Abstract: 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.

Keywords: EMU; Policy trilemma; Eurozone; Free capital mobility; Fiscal policy; Financial stability; Financial crisis (search for similar items in EconPapers)
JEL-codes: E61 F41 C21 C23 (search for similar items in EconPapers)
Date: 2018
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