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The policy-mix in the Euro Area: The Role of Financial Stability

Claudiu Albulescu () and Cornel Oros

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Abstract: This paper analyses the impact of monetary and fiscal policies' interaction on the financial stability of the eurozone. Based on the construction of a financial stability index for the entire euro area, we assess the impact in terms of the stability of different configurations of policy-mix using a static Keynesian model in a closed monetary union. Mainly following the nature of fiscal spillovers, we show that fiscal coordination may be useful to improve the quality of the European Monetary Union financial stabilisation. The explicit consideration by the European Central Bank of the aggregate euro area financial stability as one of its macroeconomic objectives makes the non-cooperative game efficient. This configuration allows for a better macroeconomic and financial stabilisation at the aggregate level, which also has a positive effect at an individual level.

Keywords: economic policy; financial stability; fiscal coordination; euro area (search for similar items in EconPapers)
Date: 2014
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Published in Economics Bulletin, Economics Bulletin, 2014, 34 (2), pp.705-717

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