Trilemma
Channel: Department of Economics
Date: 2012-04-03

This clip discusses the open economy policy trilemma, which states that any country can choose always only two of the following three desirable options: (1) Monetary policy autonomy to target domestic activity; (2) free capital flows and (3) exchange rate stability. Broadly, the international financial system focused (a) during post-WWII decades on (2) and (3) and (b) during recent decades on (1) and (2). While the exchange rate can act as an automatic stabilizer under (b), it is not clear that maintenance of internal and external balance has become any easier.