Confronting the Trilemma: Culture, Institutions, and Macroeconomic Disequilibria

Although the fundamental trilemma of open-economy macroeconomics has been a popular framework for analyzing the effects of various policy combinations, it ignores how policy regimes change. Drawing from Post-Keynesian Institutionalist theory, this article considers this process in democracies as a type of technological change in which progress may be limited by insufficient knowledge and actions by vested interests. A case study of interwar France shows that these barriers often delay or weaken stabilization programs, which increase both political and economic uncertainty that further lowers aggregate demand and inhibits the attainment of macroeconomic equilibria. Although we should not generalize these observations, they suggest that understanding and addressing cultural and institutional factors may be necessary for successful countercyclical policymaking.