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The trade-offs between macroeconomics, political economy and international relations

Published online by Cambridge University Press:  10 July 2019

Michael Bordo  and
Harold James
Michael Bordo
Affiliation:
Rutgers University, Hoover Institution and NBER
Harold James*
Affiliation:
Princeton University and IMF
*
H. James (corresponding author), Princeton University, 218 Dickinson Hall, Princeton, NJ08544-1013, USA; email: hjames@princeton.edu
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Abstract

This article 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 national policy choice over 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 order, or the impossible policy choices at the heart of globalization. Frequently, the trilemmas conjure up countervailing anti-globalization tendencies and trends.

Keywords

capital flowsbanking crisesfinancial crisesmonetary policydemocracyinternational ordertrilemma

JEL classification

E40: General E50: General F30: General E52: Monetary Policy F40: General E44: Financial Markets and the Macroeconomy E43: Interest Rates: Determination, Term Structure, and Effects
Type
The past mirror: notes, surveys, debates
Information
Financial History Review , Volume 26 , Issue 3 , December 2019 , pp. 247 - 266
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Copyright
Copyright © European Association for Banking and Financial History e.V. 2019

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Footnotes

The authors thank the editor and one referee for useful comments.

References

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