It’s not a ‘Holly’ Trinity just a Trinity. By Richard Adomako

It’s not a ‘Holly’ Trinity just a Trinity. By Richard Adomako

Do you notice a substance that seeps into every facet of your life? Do you notice some individuals are getting richer in every month, every day, every second? Do you notice the prominent techniques used before your very eyes? I am of course talking about an issue you have never or rarely given a name to and that force is the monetary trilemma. An unholy trinity that consists of the intrinsic incompatibility of exchange-rate stability, capital mobility, and national policy autonomy:

“ The problem . . . simply stated, is that in an environment of formally or informally pegged rates and effective integration of financial markets, any attempt to pursue independent monetary objectives is almost certain, sooner or later, to result in significant balance-of-payments disequilibrium, and hence provoke potentially destabilizing flows of speculative capital. To preserve exchange-rate stability, governments will then be compelled to limit either the movement of capital (via restrictions or taxes) or their own policy autonomy (via some form of multilateral surveillance or joint decision making). If they are unwilling or unable to sacrifice either one, then the objective of exchange-rate stability itself may eventually have to be compromised. Over time, except by chance, the three goals cannot be attained simultaneously.” (Cohen, 1996).

The issue of a monetary trilemma becomes all the more relevant as more and more nations can be exploited into the dreaded Washington Consensus. That becomes all the more dangerous as capital mobility increases meaning those nations are faced with unfavourable conditions of the effectiveness of independent monetary and fiscal policies. This had to lead to what prominent scholar Goodman describes as the monetary trilemma has “increased the overall pressure for the monetary convergence [and] created new incentives for monetary policy cooperation.” (Cohen, 1996).

But, it is not all dumb and gloom. There could potentially be a way out. Sure, there is many examples in the 20^th century of nations being punished for not respecting the unholy trinity such as France in the 80’s and Mexico in the 90’s. As we move through the 21^st century we start to find new possibilities. One way is that capital mobility is a concept when in reality investors are generally stubborn when it comes to moving their capital which is why the try so hard to influence the politics of the nations where their money is. The extent of capital mobility remains short of absolutely perfect. As Sylvia Maxfield further added, “not all international investors are equally sensitive to monetary or fiscal changes in host countries. Governments thus still retain some room for movement to pursue independent policy objectives.” (Cohen, 1996).

Sources

Cohen, B.J., 1996. Phoenix Risen: The Resurrection of Global Finance. World Politics 48, 268–296. doi:10.1353/wp.1996.0002