Monetary Sovereignty, Exchange Rates, and Capital Controls: The Trilemma in the Interwar Period

43 Pages Posted: 13 May 2004  

Maurice Obstfeld

University of California, Berkeley - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Alan M. Taylor

University of California, Davis - Department of Economics; University of Virginia - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Jay Shambaugh

Dartmouth College - Department of Economics; Georgetown University - Department of Strategy/Economics/Ethics/Public Policy

Multiple version iconThere are 2 versions of this paper

Date Written: March 2004

Abstract

The interwar period was marked by the end of the classical gold standard regime and new levels of macroeconomic disorder in the world economy. The interwar disorder often is linked to policies inconsistent with the constraint of the open-economy trilemma the inability of policymakers simultaneously to pursue a fixed exchange rate, open capital markets, and autonomous monetary policy. The first two objectives were linchpins of the pre-1914 order. As increasingly democratic polities faced pressures to engage in domestic macroeconomic management, however, either currency pegs or freedom of capital movements had to yield. This historical analytic narrative is compelling with significant ramifications for today's world, if true but empirically controversial. We apply theory and empirics to the interwar data and find strong support for the logic of the trilemma. Thus, an inability to pursue consistent policies in a rapidly changing political and economic environment appears central to an understanding of the interwar crises, and the same constraints still apply today.

Suggested Citation

Obstfeld, Maurice and Taylor, Alan M. and Shambaugh, Jay, Monetary Sovereignty, Exchange Rates, and Capital Controls: The Trilemma in the Interwar Period (March 2004). NBER Working Paper No. w10393. Available at SSRN: https://ssrn.com/abstract=522273

Maurice Obstfeld (Contact Author)

University of California, Berkeley - Department of Economics ( email )

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Alan M. Taylor

University of California, Davis - Department of Economics ( email )

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University of Virginia - Department of Economics ( email )

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HOME PAGE: http://people.virginia.edu/~amt7u

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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United Kingdom

HOME PAGE: http://cepr.org

Jay Shambaugh

Dartmouth College - Department of Economics ( email )

309 Rockefeller Hall
Hanover, NH 03755
United States
603-646-9345 (Phone)
603-646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~economic/faculty/Shambaugh/

Georgetown University - Department of Strategy/Economics/Ethics/Public Policy

Washington, DC 20057
United States

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