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Exit Strategies, Capital Flight and Speculative Attacks: Europe's Version of the Trilemma

Andreas Steiner (), Sven Steinkamp () and Frank Westermann

No 108, Working Papers from Institute of Empirical Economic Research, Osnabrueck University

Abstract: In the winter 2011/12 a wave of internal capital flight prompted the ECB to abandon its exit strategy and to announce an unprecedented monetary expansion. We analyze this episode in several dimensions: (i) by providing an event-study analysis covering key variables from national central banks' balance sheets, (ii) by rationalizing their patterns in a portfolio balance model of the exchange rate, augmented by institutional characteristics of the TARGET2 system, and (iii) by proposing a theory-based index of exchange market pressure within the euro area. We argue that the euro area entails an inherent policy trilemma that makes it prone to speculative attacks.

Keywords: Currency Union; Exchange Market Pressure; Policy Trilemma; Speculative Attack; TARGET2. (search for similar items in EconPapers)
JEL-codes: E42 F36 F41 F45 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-mac and nep-mon
Date: 2017-10-23
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