The Dilemma or Trilemma Debate: Empirical Evidence

Pablo Anaya Longaric () and Michael Hachula

No 95, DIW Roundup: Politik im Fokus from DIW Berlin, German Institute for Economic Research

Abstract: One of the central results in international economics is that an economy cannot have at the same time independent monetary policy, free capital flows, and a fixed exchange rate. Over the last few years, however, this so-called Mundell-Flemming ‘trilemma’ has increasingly been challenged. It is argued that given the rising importance and synchronization of capital and credit flows across countries and their underlying common driving forces, the ‘trilemma’ has morphed into a ‘dilemma’: an economy cannot have at the same time independent monetary policy and an open capital account, independent of the exchange rate regime. This Roundup provides a brief overview of the debate, reviews recent empirical findings on the topic, and outlines possible directions for future research.

Pages: 6 p.
Date: 2016
New Economics Papers: this item is included in nep-ifn, nep-mon and nep-opm
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