For example, a shock to EU external demand – perhaps arising from confidence-driven developments in the United States – would lead to differentiated effects on GDP and other domestic demand variables across EU countries, with the impact depending on countryspecific factors, such as the degree of trade openness.
The parallel idea of financial dominance is more recent than fiscal dominance.2 Financial dominance refers to the possibility that the condition of the banking system could become a constraint, or dominant influence, on monetary policy, effectively forcing the central bank to pursue second- or third-best monetary policies in order to maintain financial stability.