What is policy trilemma?

The policy trilemma refers to the trade-offs a government faces when deciding international monetary policy. In particular, the policy trilemma contends that it is not possible to have all three objectives at the same time, but has to choose two from the following three options: Free movement of capital.

What is impossible trinity for RBI?

They say India is going through the classic trilemma of the ‘Impossible Trinity’. The RBI cannot have an independent monetary policy (setting domestic interest rates) in an environment of an open capital account and flexible exchange rates.

What is monetary autonomy?

Monetary autonomy. refers to the independence of a country’s central bank to affect its own money supply and conditions in its domestic economy. In a floating exchange rate system, a central bank is free to control the money supply.

What is monetary independence?

Monetary independence is at the core of the macroeconomic policy trilemma stating that an independent monetary policy, a fixed exchange rate and free movement of capital cannot exist at the same time.

What is trilemma in international finance?

The so-called trilemma of international finance maintains that a country cannot simultaneously peg an exchange rate, maintain an independent monetary policy, and permit free cross-border financial flows.

What is Fisher’s theory?

The Fisher Effect is an economic theory created by economist Irving Fisher that describes the relationship between inflation and both real and nominal interest rates. The Fisher Effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate.

Does the Federal Reserve have monetary autonomy?

The primary justification for an independent Federal Reserve is the need to insulate it from short-term political pressures. Without a degree of autonomy, the Fed could be influenced by election-focused politicians into enacting an excessively expansionary monetary policy to lower unemployment in the short-term.

What is seigniorage revenue?

Seigniorage Explained Seigniorage may be counted as revenue for a government when the money it creates is worth more than it costs to produce. This revenue is often used by governments to finance portions of their expenditures without having to collect taxes.

What is the macroeconomic trilemma?

The trilemma is an economic theory, which posits that countries may choose from three options when making fundamental decisions about their international monetary policy agreements. Today, most countries favor free flow of capital and autonomous monetary policy.

Which of the following goals are part of the monetary trilemma?

A fundamental contribution of the Mundell-Fleming framework is the impossible trinity, or the Trilemma. The Trilemma states that a country may simultaneously choose any two, but not all of the following three policy goals – monetary independence, exchange rate stability and financial integration.

What is Mundell-Fleming trilemma?

The Mundell-Fleming trilemma is an economic model first articulated by Robert Mundell and Marcus Fleming in the early 1960s, to argue that an economy cannot simultaneously choose to implement policies of monetary autonomy, free flow of capital and fixed exchange rates.