The Mundellian Trilemma and Optimal Monetary Policy in a World of High Capital Mobility

Autor:	Richard T. Froyen, Alfred V. Guender
Rok vydání:	2022
Předmět:	Inflation Trilemma Economics and Econometrics Exchange rate media_common.quotation_subject Capital (economics) Monetary policy Economics Mandate Open economy Monetary economics Independence media_common
Zdroj:	Open Economies Review. 33:631-656
ISSN:	1573-708X 0923-7992
DOI:	10.1007/s11079-021-09662-2
Popis:	This paper proposes that the Mundellian Trilemma remains valid despite the emergence of a world financial cycle. A clear distinction must be made between monetary policy independence and insulation of an open economy’s financial system. A flexible exchange rate allows an optimizing central bank to chart an independent course but does not insulate the domestic economy from foreign monetary or financial shocks. The gains from a flexible exchange rate may be considerable and vary in accordance with the mandate of the central bank. The Mundellian Trilemma highlights the acute shortage of policy instruments. We show that macroprudential policy in the form of an interest equalization tax, enhances the ability of an optimizing central bank to effectively stabilize domestic output and inflation in the presence of policy changes abroad and potentially destabilizing capital flows.
Databáze:	OpenAIRE
Externí odkaz:	https://explore.openaire.eu/search/publication?articleId=doi_dedup___::fa0097845945b94ed9efe09c2e9e9a06 https://doi.org/10.1007/s11079-021-09662-2 Zobrazit plný text záznamu Full text from SpringerLink