A Modern Reincarnation of Mundell-Fleming's Trilemma

28 Pages Posted: 6 Mar 2018

See all articles by Joshua Aizenman

Joshua Aizenman

University of Southern California - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 6, 2018


A modern incarnation of the trilemma is essential for understanding the evolving global financial architecture, and for coming up with ways to mitigate financial fragility. The scarcity of policy instruments relative to the policy goals implies complex country-specific tradeoffs between the policy goals. The financial crises of the 1990s induced Emerging markets to converge to trilemma’s middle ground -- managed exchange-rate flexibility, controlled financial integration, and viable but limited monetary independence. Capital flight crises added financial stability to trilemma’s policy goals. New policies were added to deal with financial fragility associated with financial integration, including precautionary management of international reserves by emerging markets, swap lines among OECD’s central banks, and macroeconomic prudential regulations. These trade-offs are impacted by a country’s balance sheet exposure to hard currencies, the exchange-rate regime, and the growing sensitivity to shocks emanating from the U.S. and the Eurozone in the aftermath of the Global Financial Crisis.

Keywords: The Impossible Trinity, International Reserves, Financial Crises, Financial Stability, Swap Lines, Debt and Banking Crises, Balance Sheet Exposure

JEL Classification: F31, F32, F33, F34, F36, F38

Suggested Citation

Aizenman, Joshua, A Modern Reincarnation of Mundell-Fleming's Trilemma (March 6, 2018). Available at SSRN: https://ssrn.com/abstract=3135405 or http://dx.doi.org/10.2139/ssrn.3135405

Joshua Aizenman (Contact Author)

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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