Monetary Sovereignty, Exchange Rates, and Capital Controls: The Trilemma in the Interwar Period

By M. Obstfeld, Jay C. Shambaugh, Alan M. Taylor. International Monetary Fund Staff Papers, 2004

129 citations recorded by the source corpus.

The interwar period was marked by the end of the classical gold standard regime and new levels of macroeconomic disorder in the world economy. The interwar disorder often is linked to policies inconsistent with the constraint of the openeconomy trilemma-the inability of policymakers simultaneously to pursue a fixed exchange rate, open capital markets, and autonomous monetary policy. The first two objectives were linchpins of the pre-1914 order As increasingly democratic polities faced pressures to engage in domestic macroeconomic management, however, either currency pegs or freedom of capital movements had to yield. This historical analytic narrative is compelling – with significant ramifications for today's world, if true – but empirically controversial. We apply theory and empirics to the interwar data and find strong support for the logic of the trilemma. Thus, an inability to pursue consistent policies in a rapidly changing political and economic environment appears central to an understanding of the interwar crises, and the same constraints still apply today.

View Paper: https://www.semanticscholar.org/paper/0b1d3908153c4f38856a08cf393e75d12a3023ba

Citations in the corpus

• Global Financial Cycles and Risk Premiums (2018, unknown): “We follow Obstfeld et al. (2005) in not considering one-off realignments as breaks in the peg regime.”
• The Impact of Foreign Interest Rates on the Economy: The Role of the Exchange Rate Regime (2006, unknown): “…rates affect other countries, and are consistent with recent evidence that while many countries may show “fear of floating,” interest rates in countries that actually do float show far less connection to base interest rates than countries that peg (Shambaugh, 2004; Obstfeld et al., 2004, 2005).”
• Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy (2015, unknown): “These results are in line with those of Shambaugh (2004) and Obstfeld et al. (2005), even though those papers have a sample period that is shorter by ten years.”