Economic Dimensions of Globalization

Dilip K. Das

Chapter 3 in The Economic Dimensions of Globalization, 2004, pp 67-102 from Palgrave Macmillan

Abstract: Abstract As textbooks report, the Mundellian trilemma, or “impossible trinity,” or “inconsistent trinity,” has three policy strands: (i) free capital mobility; (ii) a fixed or stable nominal exchange rate; and (iii) an autonomous monetary policy — only two of which can coexist at any point in time.1 During the Bretton Woods period (1945–71) the economic and political was not conducive to rapid trans-border capital flows. Initially, during this period, large and small war-torn economies of Europe were engrossed in postwar recovery and reconstruction endeavors with the help of the United States. They needed the autonomy of monetary policy to achieve their domestic reconstruction objective. As capital flows did not start taking place until quite late during this period, the other policy strand that came to these economies, as a residual, was adoption of the stability in exchange rates. However, the strategic priorities of the post-Bretton Woods era were different from that of the contemporary period. Of the three Mundellian conditions, autonomous monetary policy to achieve domestic objectives and free capital mobility were the choice of this period. Exchange rate stability was given up in favor of capital mobility. As capital mobility received affirmation from the policy makers, financial globalization progressed during the post-Bretton Woods era.

Keywords: Monetary Policy; Capital Mobility; Industrial Economy; Economic Dimension; Flexible Exchange Rate (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1057/9781403938671_3

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