Working Paper: CEPR ID: DP12535
Authors: Eric Monnet
Abstract: The macroeconomic policy “trilemma” is widely used as a framework to discuss the rationale for capital controls and monetary policy autonomy under the Bretton Woods system (1944-1971). Without denying its usefulness, I highlight two facts at odds with assumptions underlying the “trilemma” argument. First, conflicts between internal and external objectives were uncommon. Second, using quantitative credit controls allowed central banks to disconnect their interest rate from the domestic monetary policy stance. They assigned the interest rate to the external side while managing domestic credit expansion with direct quantitative controls. This paper documents that such mechanism was explicitly considered by contemporary economists and central bankers as a way to escape international financial constraints. In such an environment, capital controls were used to complement credit controls. Interest rate spreads were neither a good measure of capital controls nor of central bank autonomy.
Keywords: Bretton Woods; Trilemma; Capital Controls; Credit Controls; Reserve Requirements; Central Banking; Macroprudential Policies
JEL Codes: E58; F32; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| absence of frequent conflicts (D74) | sustained use of capital controls (F38) |
| quantitative credit controls (E51) | ability of central banks to maintain domestic policy autonomy (E58) |
| capital controls (F38) | complement credit controls (D10) |