The Evidence and Impact of Financial Globalization

Chapter 27

The Impossible Trinity (aka The Policy Trilemma)

J. Aizenman

University of California, Santa Cruz, CA, USA

NBER, Cambridge, MA, USA

Outline

The Trilemma and Mundell–Fleming’s Framework

The Trilemma Choices of Countries – Trends and Trade-offs

Testing the Trilemma

Beyond the Trilemma Triangle: International Reserves and the Impossible Trinity

The Trilemma and the Future Financial Architecture

Glossary

References

The Trilemma and Mundell–Fleming’s Framework

A fundamental contribution of the Mundell–Fleming framework is the impossible trinity, or the trilemma. The trilemma states that a country may simultaneously choose any two, but not all, of the following three policy goals – monetary independence, exchange-rate stability, and financial ...