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The political trilemma of the world economy

A familiar result of open-economy macroeconomics is that countries cannot simultaneously maintain independent monetary policies, fixed exchange rates, and an open capital account. This result is fondly known to the cognoscenti as the “impossible trinity,” or in Obstfeld and Taylor’s (1998) terms, as the „open- economy trilemma“. The trilemma is represented schematically in the top panel of Figure 2. If a government chooses fixed exchange rates and capital mobility, it has to give up monetary autonomy. If it wants monetary autonomy and capital mobility, it has to go with floating exchange rates. If it wants to combine fixed exchange rates

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