Working Paper: NBER ID: w21017
Authors: Michael Bordo; Harold James
Abstract: This paper explains the problem of adjustment to the challenges of globalization in terms of the logic underpinning four distinct policy constraints or trilemmas, and their interrelationship, and in particular the disturbances that arise from capital flows. The analysis of a policy trilemma was developed first as a diagnosis of exchange rate problems (the incompatibility of free capital flows with monetary policy autonomy and a fixed exchange rate regime); but the approach can be extended. The second trilemma we describe is the incompatibility between financial stability, capital mobility and fixed exchange rates. The third example extends the analysis to politics, and looks at the strains in reconciling democratic politics with monetary autonomy and capital movements. Finally we examine the security aspect and look at the interactions of democracy with capital flows and international order. The trilemmas in short depict the way that domestic monetary, financial, economic and political systems are interconnected with the international. They can be described as the impossible policy choices at the heart of globalization. Frequently, the trilemmas conjure up countervailing anti-globalization tendencies and trends.
Keywords: No keywords provided
JEL Codes: E4; E6; N1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| free capital flows, fixed exchange rate, independent monetary policy cannot coexist (F32) | trade-offs among these options (D79) |
| unrestricted capital flows (F32) | financial stability compromised (F65) |
| failure to manage capital inflows (F32) | financial crises (G01) |
| democratic governments face challenges in maintaining monetary autonomy while attracting capital inflows (F32) | short-term electoral pressures conflict with long-term stability (D72) |
| interaction between democracy and international order (F02) | tensions exacerbated (D74) |