The Mundellian Trilemma and Optimal Monetary Policy in a World of High Capital Mobility

Richard T. Froyen () and Alfred Guender
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Richard T. Froyen: University of North Carolina

Open Economies Review, 2022, vol. 33, issue 4, No 2, 656 pages

Abstract: Abstract This paper proposes that the Mundellian Trilemma remains valid despite the emergence of a world financial cycle. A clear distinction must be made between monetary policy independence and insulation of an open economy’s financial system. A flexible exchange rate allows an optimizing central bank to chart an independent course but does not insulate the domestic financial sector or broader economy from foreign monetary or financial shocks. The gains from a flexible exchange rate may be considerable and vary in accordance with the mandate of the central bank. The Mundellian Trilemma highlights the acute shortage of policy instruments and resulting tradeoffs among policy goals.

Keywords: Mundellian trilemma; Policy independence; Capital mobility; Instrument shortage; Capital controls; E3; E5; F3 (search for similar items in EconPapers)
Date: 2022
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Working Paper: The Mundellian Trilemma and Optimal Monetary Policy in a World of High Capital Mobility (2021)
Working Paper: The Mundellian trilemma and optimal monetary policy in a world of high capital mobility (2021)
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DOI: 10.1007/s11079-021-09662-2

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