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Trilemmas and Tradeoffs: Living with Financial Globalization

In: Global Liquidity, Spillovers to Emerging Markets and Policy Responses

Listed author(s):
  • Maurice Obstfeld

    (University of California, Berkeley)

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.

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This chapter was published in: Claudio Raddatz & Diego Saravia & Jaume Ventura (ed.) Global Liquidity, Spillovers to Emerging Markets and Policy Responses, , chapter 02, pages 013-078, 2015.
This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v20c02pp013-078.
Handle: RePEc:chb:bcchsb:v20c02pp013-078
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