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The Mundell-Fleming Trilemma: Implications for the CBN and the financial markets

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  • Okotori, Tonprebofa Waikumo
  • Ayunku, Peter

Abstract

In this paper using monthly data for the period 1981-2018, we adopted VARmethodology to show the nexus of foreign direct investment(FDI), the exchange rate (EXR), and net exports in order to reveal the effect of one variable on the other. Granger causality test, impulse response functions as well as block wald/exogeneity were used to test the given hypothesis. The results show that FDI did not granger cause exchange rate (EXR), but exchange rate granger causes exchange rate volatility, but the exchange rate does not granger cause net exports and that net exports granger causes FDI, the FDI was found to granger net exports. The policy implication for the CBN can be seen in the fact that undermanaged capital flows and managed exchange rate regimes the bank might choose to influence growth in sectors of the economy such as the financial markets. It might not be certain that the CBN cannot thus operate an independent monetary policyasthecoreprescriptionsoftheMundell-Flemingmodelhavebeenbreached.

Suggested Citation

  • Okotori, Tonprebofa Waikumo & Ayunku, Peter, 2020. "The Mundell-Fleming Trilemma: Implications for the CBN and the financial markets," MPRA Paper 103880, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:103880
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    References listed on IDEAS

    as
    1. Aizenman, Joshua, 2010. "The Impossible Trinity (aka The Policy Trilemma)," Santa Cruz Department of Economics, Working Paper Series qt9k29n6qn, Department of Economics, UC Santa Cruz.
    2. Alberto Botta, 2014. "The Macroeconomics of a Financial Dutch Disease," DEM Working Papers Series 089, University of Pavia, Department of Economics and Management.
    3. Aizenman, Joshua & Chinn, Menzie D. & Ito, Hiro, 2016. "Monetary policy spillovers and the trilemma in the new normal: Periphery country sensitivity to core country conditions," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 298-330.
    4. Mr. Nicolas Arregui & Mr. Selim A Elekdag & Mr. Gaston Gelos & Romain Lafarguette & Dulani Seneviratne, 2018. "Can Countries Manage Their Financial Conditions Amid Globalization?," IMF Working Papers 2018/015, International Monetary Fund.
    5. Aizenman, Joshua, 2019. "A modern reincarnation of Mundell-Fleming's trilemma," Economic Modelling, Elsevier, vol. 81(C), pages 444-454.
    6. Raghuram Rajan, 2015. "Competitive monetary easing: is it yesterday once more?," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 8(1-2), pages 5-16, July.
    7. Hyeon-Seung Huh, 1999. "How well does the Mundell-Fleming model fit Australian data since the collapse of Bretton Woods?," Applied Economics, Taylor & Francis Journals, vol. 31(3), pages 397-407.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Foreign direct investment; VAR; CBN; Mundell-Fleming;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • N27 - Economic History - - Financial Markets and Institutions - - - Africa; Oceania
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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