The Trilemma in History:Tradeoffs among Exchange Rates, Monetary Policies,and Capital Mobility

Maurice Obstfeld, Jay C.Shambaugh and Alan M. Taylor ()

DNB Staff Reports (discontinued) from Netherlands Central Bank

Abstract: Recently, the political economy of macroeconomic policy choice has increasingly been guided by the simple prescriptions of the classic trilemma. For example, policymakers often speak of the hollowing out of exchange rate regimes in a world of unstoppable capital mobility; and policy autonomy and a fixed nominal anchor present an unpleasant dichotomy for emerging markets beset by the fear of floating. Yet the trilemma is not an uncontroversial maxim, and its empirical foundations deserve greater attention. Some authors (e.g., Calvo and Reinhart 2001, 2002) have argued that under the modern float there could be limited policy autonomy given the rapid international transmission of interest rate shocks; others (e.g., Bordo and Flandreau 2003) that even under the classical gold standard there actually was considerable policy autonomy given the gold point spread and the use of gold devices and other tricks. Such arguments turn the trilemma on its head. Resolving this debate is ultimately an empirical matter, where the broadest span of data should be scrutinized. Using new techniques to study the coherence of international interest rates at high frequency, in conjunction with an examination of capital mobility policies and a data-based classification of exchange rate regimes, we look at the empirical content of the trilemma based on consistent data over 130+ years. On the whole, the predictions of this influential adage are borne out by history.

New Economics Papers: this item is included in nep-ifn, nep-mac and nep-mon
Date: 2003
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Related works:
Working Paper: The Trilemma in History: Trade-offs Among Exchange Rates, Monetary Policies and Capital Mobility (2004)
Working Paper: The Trilemma in History: Tradeoffs among Exchange Rates, Monetary Policies, and Capital Mobility (2004)
Working Paper: The Trilemma in History: Tradeoffs among Exchange Rates, Monetary Policies, and Capital Mobility (2004)
Working Paper: The Trilemma in History: Tradeoffs among Exchange Rates, Monetary Policies, and Capital Mobility (2004)
Journal Article: The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility (2005)
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