Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy

Michael Klein and Jay Shambaugh

No 13-E-14, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: A central result in international macroeconomics is that a government cannot simultaneously opt for open financial markets, fixed exchange rates, and monetary autonomy; rather, it is constrained to choosing no more than two of these three. In the wake of the Great Recession, however, there has been an effort to address macroeconomic challenges through intermediate measures, such as narrowly targeted capital controls or limited exchange rate flexibility. This paper addresses the question of whether these intermediate policies, which round the corners of the triangle representing the policy trilemma, afford a full measure of monetary policy autonomy. Our results confirm that extensive capital controls or floating exchange rates enable a country to have monetary autonomy, as suggested by the trilemma. Partial capital controls, however, do not generally enable a country to have greater monetary control than is the case with open capital accounts unless they are quite extensive. In contrast, a moderate amount of exchange rate flexibility does allow for some degree of monetary autonomy, especially in emerging and developing economies.

Keywords: Exchange Rate Regimes; Trilemma; Monetary Policy; Capital Controls (search for similar items in EconPapers)
JEL-codes: E42 E58 F3 F33 F42 (search for similar items in EconPapers)
Date: 2013-12
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (60)

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Related works:
Journal Article: Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy (2015)
Working Paper: Rounding the Corners of the Policy Trilemma: Sources of monetary policy autonomy (2015)
Working Paper: Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:13-e-14

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