Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy
AbstractA 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.
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Bibliographic InfoPaper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 13-E-14.
Date of creation: Dec 2013
Date of revision:
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Exchange Rate Regimes; Trilemma; Monetary Policy; Capital Controls;
Other versions of this item:
- Michael W. Klein & Jay C. Shambaugh, 2013. "Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy," NBER Working Papers 19461, National Bureau of Economic Research, Inc.
- F3 - International Economics - - International Finance
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-01-10 (All new papers)
- NEP-CBA-2014-01-10 (Central Banking)
- NEP-MAC-2014-01-10 (Macroeconomics)
- NEP-MON-2014-01-10 (Monetary Economics)
- NEP-OPM-2014-01-10 (Open Economy Macroeconomic)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Blogs review: Navigating the open economy trilemma
by ? in Bruegel blog on 2013-10-01 08:15:34
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