Exit Strategies, Capital Flight and Speculative Attacks: Europe's Version of the Trilemma
35 Pages Posted: 23 Jan 2018
Date Written: November 28, 2017
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: Suggested Citation