DP4352 The Trilemma in History: Trade-offs Among Exchange Rates, Monetary Policies and Capital Mobility

Author(s): Maurice Obstfeld , Jay C Shambaugh , Alan M. Taylor

Publication Date: April 2004

Keyword(s): trilemma , exchange rates , monetary policy

JEL(s): F33 , F41 , F42

Programme Areas: International Macroeconomics

Initiatives: Economic History

Link to this Page: www.cepr.org/pubs/dps/DP4352.asp

The exchange-rate regime is often seen as constrained by the monetary policy trilemma, which imposes a stark trade-off 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.