Fiscal rules, financial stability and optimal currency areas

- We test the existence of a trade-off between fiscal rules, financial integration and financial stability in the EMU.
- We provide evidence of the existence of such a trade-off during the crisis.
- In general, the respect of fiscal rules has been the main goal for EMU members.
- During the crisis fiscal co-movements diminished to preserve financial stability.
- Strict fiscal rules can make EMU countries more vulnerable to financial instability.

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; 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 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.