Fiscal Rules, Financial Stability and Optimal Currency Areas

17 Pages Posted: 24 Jun 2015

See all articles by Paul De Grauwe

Paul De Grauwe

CESifo (Center for Economic Studies and Ifo Institute for Economic Research); London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Pasquale Foresti

London School of Economics & Political Science (LSE)

Date Written: June 23, 2015

Abstract

In this paper we suggest that Eurozone countries face a policy trade-off among: 1) a common rule imposing co-movements in fiscal policy; 2) financial stability; and 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 reduced the capacity of national governments to deal with asymmetric shocks and became incompatible with either free capital mobility and/or financial stability.

Keywords: fiscal policy rules, Eurozone, financial stability, policy objectives, optimal currency areas

JEL Classification: E440, E610, E620

Suggested Citation

De Grauwe, Paul and De Grauwe, Paul and Foresti, Pasquale, Fiscal Rules, Financial Stability and Optimal Currency Areas (June 23, 2015). CESifo Working Paper Series No. 5390, Available at SSRN: https://ssrn.com/abstract=2622004 or http://dx.doi.org/10.2139/ssrn.2622004

Paul De Grauwe (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Pasquale Foresti

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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