journal. 6 see helene rey ( 2013 ), “ dilemma not trilemma : the global financial cycle and monetary policy independence ”. in : jackson hole economic symposium 2013. 7 according to the trilemma, in a financially integrated world, fixed exchange rates export the monetary policy of the centre country to the periphery. the corollary is that if there are free capital flows, it is possible to have independent monetary policies only by having the exchange rate float ; and conversely, that floating exchange rates enable monetary policy independence ( see e. g. obstfeld and taylor ( 2004 ) ). 8 see e. g. olivier jeanne and anton korinek ( 2010 ) “ excessive volatility in capital flows : a pigouvian taxation approach ”, american economic review papers & proceedings 100 ( 2 ), pp. 403 - 407 and emmanuel farhi and ivan werning ( 2014 ), “ dilemma not trilemma? capital controls and exchange rates with volatile capital flows, ” imf economic review 62, pp. 569 - 605. 9 under the imf new institutional view, cfms should not substitute for warranted macroeconomic adjustments. circumstances which allow for cfms on capital inflows include for example a situation in which the economy is overheating, the exchange rate is overvalued and reserves are at adequate levels. similarly, cfms could be applied on capital outflows if the economy is stagnating, fx exposures are high, and reserve levels are inadequate. 10 in many studies gains are of second order of magnitude as financial integration enables a reduction of consumption volatility but does not affect output ( see nicolas coeurdacier, helene rey and pablo winant, 2015 “ financial integration and growth in a risky world ”, nber working paper, no. 21817 ). 11 one estimate suggests that the standard deviation of income growth uncertainty is reduced through financial markets by as much as 35 % across u. s. states ( see stefano g. athanasoulis and eric van wincoop, ( 2001 ), “ risk sharing within the united states : what do financial markets and fiscal federalism accomplish?, ” the review of economics and statistics, 83 ( 4 ), pp. 688 - 698. according to a recent imf paper, cross - country risk sharing in the euro area is not only more limited ( roughly half that seen in existing federations ), but also falls sharply

is published today. 2 / 3 bis central bankers'speeches as a general rule, the running of budget surpluses during phases of strong economic performance is a precondition for the running of stabilising, counter - cyclical fiscal deficits in the event of a future downturn. if fiscal buffers are not built up, there is a risk of repeating the historical patterns by which economic downturns have been amplified by pro - cyclical fiscal austerity. there are three further reasons to set more ambitious fiscal targets in the current environment. first, it cannot be ruled out that the surge in corporation tax revenues may have some temporary elements, indicating that some part of these revenues should be categorised as a windfall. second, to the extent that the current low interest rate environment is not expected to persist indefinitely, a tighter non - interest budget balance offers protection against future increases in debt servicing costs. third, the legacy of high public and private debt levels mean that ireland is relatively more vulnerable to reversals compared to other countries with less - leveraged public and private balance sheets. in addition to striking the cyclically - appropriate fiscal balance, individual fiscal levers can contribute to macro - financial stabilisation, especially for a country in a monetary union. for instance, raising the vat rate on labour - intensive activities during upturns proxies the stabilising role of exchange rate appreciation, while raising taxes on investment and consumption during phases of strong growth substitutes for the cyclical role played by an interest rate hike in an independent monetary regime. symmetrically, these taxes can be cyclically lowered during a future downturn to provide similar support that would be provided by currency devaluation and interest rate reductions under an independent currency. conclusions in closing, my aim in these introductory remarks has been to describe the current agenda for macro - financial risk management. the current economic performance is very welcome – but it is important to be pro - active in mitigating pro - cyclical dynamics and building up buffers to limit the costs of future downturns. as i have outlined, both regulatory policies and fiscal policy have essential roles to play in macro - financial risk management. 3 / 3 bis central bankers'speeches