Fiscal rules, financial stability and optimal currency areas

de Grauwe, Paul and Foresti, Pasquale (2016) Fiscal rules, financial stability and optimal currency areas. Economics Letters, 145 (C). pp. 278-281. ISSN 0165-1765

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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.

Item Type:	Article
Official URL:	http://www.journals.elsevier.com/economics-letters
Additional Information:	© 2016 Elsevier B.V.
Library of Congress subject classification:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
Journal of Economic Literature Classification System:	E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation F - International Economics > F3 - International Finance
Sets:	Departments > European Institute Collections > Economists Online
Date Deposited:	09 Aug 2016 12:40
URL:	http://eprints.lse.ac.uk/67404/

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