Trilemmas and Tradeoffs: Living with Financial Globalization

Maurice Obstfeld

Chapter 2 in The Asian Monetary Policy Forum:Insights for Central Banking, 2021, pp 16-84 from World Scientific Publishing Co. Pte. Ltd.

Abstract: This paper evaluates the capacity of emerging market economies (EMEs) to moderate the domestic impact of global financial and monetary forces through their own monetary policies. Those EMEs able to exploit a flexible exchange rate are far better positioned than those that devote monetary policy to fixing the rate — a reflection of the classical monetary policy trilemma. However, exchange rate changes alone do not insulate economies from foreign financial and monetary shocks. While potentially a potent source of economic benefits, financial globalization does have a downside for economic management. It worsens the tradeoffs monetary policy faces in navigating among multiple domestic objectives. This drawback of globalization raises the marginal value of additional tools of macroeconomic and financial policy. Unfortunately, the availability of such tools is constrained by a financial policy trilemma, distinct from the monetary trilemma. The second trilemma posits the incompatibility of national responsibility for financial policy, international financial integration, and financial stability.

Keywords: Monetary Policy; Price Stability; Monetary Sovereignty; Monetary Policy Independence; Macroprudential Policies Financial Stability; Financial Volatility; Financial Globalization; Capital Mobility Trilemma; Dilemma; Small Open Economies; Emerging Market Economies; Exchange Rate Regime; Floating Exchange Rate; Pegged Exchange Rate; Real Exchange Rate; Nominal Exchange Rate; International Monetary System; Bond Markets; International Claims; Currency Market; Market Liberalization; Capital Control; Exchange Rate Intervention; Foreign Exchange Reserves; Dollar Hegemon; Dollar Dominance; International Payment System; Invoicing Currency; Integrated Policy Framework; Risk-on; Risk-off; Safe Assets; Global Financial Architecture (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (8)

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Chapter: Trilemmas and Tradeoffs: Living with Financial Globalization (2015)
Working Paper: Trilemmas and trade-offs: living with financial globalisation (2015)
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