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

35 Pages Posted: 23 Jan 2018

See all articles by Andreas Steiner

Andreas Steiner

University of Osnabrueck, Institute of Empirical Economic Research

Sven Steinkamp

Universität Osnabrück - Institute of Empirical Economic Research

Frank Westermann

University of Osnabrueck - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Date Written: November 28, 2017

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

JEL Classification: E420, F360, F410, F450

Suggested Citation

Steiner, Andreas and Steinkamp, Sven and Westermann, Frank, Exit Strategies, Capital Flight and Speculative Attacks: Europe's Version of the Trilemma (November 28, 2017). CESifo Working Paper Series No. 6753. Available at SSRN: https://ssrn.com/abstract=3106705

Andreas Steiner

University of Osnabrueck, Institute of Empirical Economic Research ( email )

Rolandstrasse 8
Osnabrück, D-49069
Germany

Sven Steinkamp

Universität Osnabrück - Institute of Empirical Economic Research ( email )

Barbarastr. 12
Osnabrueck, 49076
Germany

Frank Westermann (Contact Author)

University of Osnabrueck - Department of Economics ( email )

Rolandstr. 8
Osnabrueck, D-49069
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

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