Independent Monetary Policy: Impossible Trinity

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One of the most problematic issue in economy is refers to ’’ İmpossible Trinity’ ’,which means that only two out of three choices can be applicable. This options are called : a fixed exchange rate, free capital mobility and an independent monetary policy as we show above figure . That is; It is less likely to possible to have 3 options at the same time. A country can apply a fixed exchange rate which enables capital flows automatically because of running open economy and so a country cannot maintain an independent monetary policy. Helene Rey states that It is only way to provide independent monetary policy is to have free capital flows ,which leads to have floating exchange rate. According to Helene Rey ‘’ the global financial cycle transforms the trilemma into a dilemma’’. Targeted capital controls, sources of the financial cycle itself by the monetary policy of the Fed and other main central banks,transmission channel by limiting credit growth and leverage,transmission channel by imposing stricter limits on leverage for all financial intermediaries are most significant solution of this global financial cycle or ’’dilemma’’. Since financial cycle is globalized, capital flows, asset prices and credit growth take part in this cycle. Moreover; this cycle based on some indicators but before the explaining this part, I want to say that VIX is indicator of uncertainty and risk aversion of the markets because financial cycle is directly and positively related with the VIX. In general; VIX, foreign direct investment and other types of flows have highly correlated relationship. Capital flows are also positively related to VIX. Also; we can see that portfolio debt is increase as also credit inflow rises.??? Credit flows are ... ... middle of paper ... ... which is supported by data in article. In my opinion; if I think which one is more realistic, it is completely seen that ‘’Dilemma’’ has a validity in today’s world. In our world; Trilemma cannot be sustained actually in real world because of some reasons.since cente country determine the monetary policy and so other countries follow the centre country’s policy. Countries have to adjust their monetary policies which is putting by centre country like USA . Moreover ; capital controls are challenging in today’s world so it can create much more distortions. Therefore; I disagree with Trilemma in History with respect to this ideas. Dilemma framework is more proper to today’s world because USA provide a monetary independence and it shapes monetary approach of the world. Under this conditions ‘’Dilemma ‘’ is more sustainable approach in current era.

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