Sunday, July 11, 2010

Economic View - The Trilemma of International Finance -

Good article (especially for an International Finance class or Money and Banking) in todays NY Times by Harvard's N. Gregory Mankiw

Economic View - The Trilemma of International Finance -
"What is the trilemma in international finance? It stems from the fact that, in most nations, economic policy makers would like to achieve these three goals:

• Make the country’s economy open to international flows of capital....

•Use monetary policy as a tool to help stabilize the economy. The central bank can then increase the money supply and reduce interest rates when the economy is depressed, and reduce money growth and raise interest rates when it is overheated.

•Maintain stability in the currency exchange rate...."

The article goes on to discuss the tenet that you can only have two of the three.

( I would be tempted to discuss Financial Derivatives as Hedging tools that can largely reduce the need for the third goal, but.....)

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