The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility

41 Pages Posted: 10 May 2004 Last revised: 28 Nov 2022

See all articles by Maurice Obstfeld

Maurice Obstfeld

University of California, Berkeley; Peterson Institute for International Economics; National Bureau of Economic Research; Centre for Economic Policy Research

Jay Shambaugh

George Washington University - Department of Economics; George Washington University - Elliott School of International Affairs (ESIA)

Alan M. Taylor

University of California, Davis - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: March 2004

Abstract

The exchange-rate regime is often seen as constrained by the monetary policy trilemma, which imposes a stark tradeoff among exchange stability, monetary independence, and capital market openness. Yet the trilemma has not gone without challenge. Some (e.g., Calvo and Reinhart 2001, 2002) argue that under the modern float there could be limited monetary autonomy. Others (e.g., Bordo and Flandreau 2003), that even under the classical gold standard domestic monetary autonomy was considerable. This paper studies the coherence of international interest rates over more than 130 years. The constraints implied by the trilemma are largely borne out by history.

Suggested Citation

Obstfeld, Maurice and Shambaugh, Jay and Taylor, Alan M., The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility (March 2004). NBER Working Paper No. w10396, Available at SSRN: https://ssrn.com/abstract=522276

Maurice Obstfeld (Contact Author)

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Jay Shambaugh

George Washington University - Department of Economics ( email )

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Alan M. Taylor

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