Exchange Rates Regimes and the Financial Trilemma: an Evaluation for the Post-Bretton Woods

Abstract

Highlights: The choice of the exchange rate regime is one of the most argued topics in economic policy. Since the collapse of the Bretton Woods system, countries have adopted different exchange rate arrangements. In this chapter we make an evaluation of the discussions around the regime choice, and the financial trilemma. Our main focus is to provide a historic review on this discussion and how it has translated itself after the global financial crisis. More recently, the trilemma view has been brought into question after the global financial crisis. Rey (2015, 2016) argues that “whenever capital is freely mobile, the global financial cycle constrains national monetary policies regardless of the exchange rate regime.” Accordingly, the classical monetary trilemma transforms into a “dilemma” or an “irreconcilable duo” where the exchange rate regime loses importance. We discuss whether the trilemma prevails and exchange rates provide effective insulating mechanisms. While the debate is still ongoing the strong standing argument is that exchange rate regime still matters. The trade-off between exchange rate stability, monetary policy autonomy, and financial integration also hold. However, with the size of global linkages the trade-offs have become harsher.