Trilemmas and trade-offs: living with financial globalisation

Maurice Obstfeld

No 480, BIS Working Papers from Bank for International Settlements

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 that are 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 globalisation does have a downside for economic management. It worsens the trade-offs monetary policy faces in navigating among multiple domestic objectives. This drawback of globalisation 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 that is distinct from the monetary trilemma. This second trilemma posits the incompatibility of national responsibility for financial policy, international financial integration and financial stability.

Keywords: policy trilemma; financial stability; financial globalisation; international policy transmission (search for similar items in EconPapers)
Pages: 66 pages
Date: 2015-01
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (95)

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Related works:
Chapter: Trilemmas and Tradeoffs: Living with Financial Globalization (2021)
Chapter: Trilemmas and Tradeoffs: Living with Financial Globalization (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:480

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