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The political economy of the impossible trinity

Joscha Beckmann (), Esther Ademmer, Ansgar Belke () and Rainer Schweickert

European Journal of Political Economy, 2017, vol. 47, issue C, 103-123

Abstract: This paper reconsiders the policy trilemma in an open economy by incorporating political economy concerns. We argue that the impact of government ideology on monetary independence, exchange rate stability, and capital flow restrictions should be analyzed in the broader context of restrictions imposed by the impossible trinity instead of the usual single-dimensional constraints. Employing a de facto measurement of these restrictions for a sample of 111 countries from 1980 to 2010, we show that the impact of government ideology on a country's position in this trilemma is highly context dependent: we find that its impact on exchange rate stability and monetary independence varies between developed and developing countries. We also show that the impact of government ideology on these two trilemma components is contingent on the stance of the respective economy's business cycle. Left-leaning governments seem to favor exchange rate stability over monetary independence in case of a negative output gap; suggesting a reversal of their commonly assumed partisan preferences in economically tight times.

Keywords: Political economy; Exchange rates; Impossible trinity (search for similar items in EconPapers)
JEL-codes: F6 H8 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:poleco:v:47:y:2017:i:c:p:103-123