Working Paper: CEPR ID: DP4352
Authors: Maurice Obstfeld; Jay C. Shambaugh; Alan M. Taylor
Abstract: 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.
Keywords: Exchange rates; Monetary policy; Trilemma
JEL Codes: F33; F41; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate regimes (F33) | monetary independence (E49) |
| pegged exchange rates (gold standard) (F33) | local interest rates follow base country interest rates (E43) |
| pegged exchange rates (Bretton Woods) (F33) | local interest rates follow base country interest rates (E43) |
| pegged exchange rates (post-Bretton Woods) (F31) | local interest rates follow base country interest rates (E43) |