A BRIEF HISTORY OF THE TRILEMMA

My work is intended to show that the policy trilemma is a measure of stability and performance especially at a country level. I strongly think that the argument I am going to cover and discuss has been and continues to be underestimated by, in general, people and institutions responsible for the financial equilibrium and for all the issues concerning the public policymaking. Actually there exist endless kinds of trilemma dealing with problems even quite far away from the economic field. The one (and the others) I am going to talk about is also known as the impossible trinity, as a ‘violation’ of it undermines the stability of a country if it tries to achieve all three policy objectives being part of it. Such policy objectives are the following: 1.Independent monetary policy; 2.Capital controls; 3.Fixed exchange rates. It is very useful and valuable to figure out how the impossible trinity works as a policymaker could get the point of the context and, for example, organizes its domestic trades sooner than potential policy failures of the central banks. [ My work is divided into three part (corresponding to three chapters): First, it will present a historical overview of the international monetary system since the early ‘900, going through the Gold Standard, the Bretton Woods System and finishing to the present day, with a special mention of the European case. In the second chapter, I will explain the origins, the sense and the different implications the trilemma have had across the last two centuries. First I will display how Mundell and Fleming with their joint work came to the conclusion that a nation can attain only two out of three objectives of the trilemma. Then, I will look at several aspects involved in it, which are, in order, the financial openness, the exchange rate system and finally how the trilemma can affect politics. In the third and last chapter I will illustrate two cases very different from each others, but at the same time very representative as concerns the trilemma and its recent evolution. The first is the Asian financial crisis of 1997, a typical example of failure, which happens if a state, or a group of them, tries to attain all the three objectives simultaneously. The second case is the extension of the last part of the first chapter. Indeed, it is about the European Monetary Union. However, in such a case, even if the exchange rate does not exist, as we have only one currency, the trilemma theory stands as well, replacing the fixed exchange rate condition with the no bailout clause.