Exchange rate pegs getting a new look?
This article at Voxeu reminded me that exchange rate pegs might come back in vogue. Voxeu has an article on the “trilemma” of ’emerging’ economies:
Do sterilised interventions allow countries a way around the fundamental trilemma of international finance by providing them with a means of systematically affecting exchange rates independent of their monetary policies? Japan, Switzerland, and China provide some lessons…
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The fundamental 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 (Feenstra and Taylor 2008). At best, only two of the three are feasible.
Lifted from a note, Rebecca Wilder writes in an informal e-mail:
I found it rather difficult to read. But this idea of trilemma is not broadly applicable to developed markets except Switzerland – they did address that. I don’t know, the one thing that I do notice, is that the trade ‘imbalances’ are not really moving back into ‘balance’ neither in Europe nor globally. Thus, something’s gotta give at some point; I suspect that it’ll be exchange rate pegs.
When the FT covered this recently I got into a discussion regarding the “trilemma” with Philip Pilkington. The article suggests the case of Switzerland upholds the “trilemma” because the SNB was forced to relinquish control over its monetary base. If independent monetary policy is meant to refer to controlling interest rates, rather than the monetary base, then the “trilemma” is not fundamental. As Philip noted, “they could easily maintain control over interest rates by paying a set rate of interest on reserves, just like the US/UK/Japan do with their base rate.” As long as the SNB is willing to acquire unlimited amounts of foreign reserves it CAN maintain a currency floor, “independent monetary policy, and permit free cross-border financial flows.”
When the FT covered this recently I got into a discussion regarding the “trilemma” with Philip Pilkington. The article suggests the case of Switzerland upholds the “trilemma” because the SNB was forced to relinquish control over its monetary base. If independent monetary policy is meant to refer to controlling interest rates, rather than the monetary base, then the “trilemma” is not fundamental. As Philip noted, “they could easily maintain control over interest rates by paying a set rate of interest on reserves, just like the US/UK/Japan do with their base rate.” As long as the SNB is willing to acquire unlimited amounts of foreign reserves it CAN maintain a currency floor, “independent monetary policy, and permit free cross-border financial flows.”