Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy

Michael Klein and Jay Shambaugh

No 19461, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A central result in international macroeconomics is that a government cannot simultaneously opt for open financial markets, fixed exchange rates, and monetary autonomy; rather, it is constrained to choosing no more than two of these three. In the wake of the Great Recession, however, there has been an effort to address macroeconomic challenges through intermediate measures, such as narrowly targeted capital controls or limited exchange rate flexibility. This paper addresses the question of whether these intermediate policies, which round the corners of the triangle representing the policy trilemma, afford a full measure of monetary policy autonomy. Our results confirm that extensive capital controls or floating exchange rates enable a country to have monetary autonomy, as suggested by the trilemma. Partial capital controls, however, do not generally enable a country to have greater monetary control than is the case with open capital accounts unless they are quite extensive. In contrast, a moderate amount of exchange rate flexibility does allow for some degree of monetary autonomy, especially in emerging and developing economies.

JEL-codes: E52 F3 F33 F41 (search for similar items in EconPapers)
Date: 2013-09
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac, nep-mon and nep-opm
Note: IFM
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Published as Michael W. Klein & Jay C. Shambaugh, 2015. "Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(4), pages 33-66, October.

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Journal Article: Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy (2015)
Working Paper: Rounding the Corners of the Policy Trilemma: Sources of monetary policy autonomy (2015)
Working Paper: Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy (2013)
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