Disciplines
Finance and Financial Management
Abstract
There is a general recognition that there are deficiencies in the Mundell-Fleming model. Nonetheless, Rose [2000] has stated that Mundell was the first to exposit the Policy Trilemma, which identifies an intrinsic incompatibility among: high capital mobility, fixed exchange rates, and monetary autonomy. We look for the source of Rose’s claim. All of Mundell’s formal modeling after 1964 assumes that capital mobility is zero, so we look to earlier work for verification. The paper in Kyklos states clearly that in comparing equilibrium positions, the impotence of monetary policy is independent of the degree of capital mobility. Two further claims deriving from that model are explored using a analysis which portrays the asset markets consistently: that both the short- and the long-run equilibria are independent of capital mobility; and that the speed of adjustment is higher the greater is capital mobility. We find that in every case these results are overturned in the portfolio balance model.
Recommended Citation
Boyer, Russell S., "Can the Policy Trilemma Be Exposited in the Mundell-Fleming Framework?" (2006). CRIF Seminar series. 9.
https://research.library.fordham.edu/crif_seminar_series/9
