Apr 6 (W): 22. Economic constraints on financial policymaking: the “impossible trinity.” Optimal currency area theory. International conflict over monetary and exchange rate policies. Writeup # 3 due Mon Apr 11 8:00p.

Joshua Aizenman, “The Impossible Trinity (aka the Policy Trilemma),” 211-220, in Frieden, Lake, and Broz, eds., International Political Economy, 6^th (New York: WW Norton, 2017), Aizenman.pdf
Michael M. Phillips, “How a Small Firm Rides Foreign-Exchange Waves,” Wall Street Journal (February 7, 2003), C1, C7, Phillips WSJ 2003.pdf
“Why Ecuador Uses the Dollar?”, NPR: Planet Money (Nov 1, 2018), Ecuador.pdf

Additional Resources: Paddy Hirsch, "How Russia Rescued the Ruble," NPR Planet Money [podcast transcript] (Apr 5, 2022), Hirsch NPR 2022.pdf

Slides: Session 22 ~ International Finance II-1.pptx

Class Recording: Session 22 Recording (Apr 6)

Discussion Thread: Discussion Thread for Sessions 21-22

Concepts

impossible trinity or trilemma
optimal currency area
exchange rate, exchange rate regime, fixed or 'hard peg' vs. intermediate peg vs. floating exchange rate regime
dollarization
de facto vs de jure exchange rate regime
current account vs capital account
current account deficit/surplus
balance of payments
foreign exchange reserves
monetary policy - interest rate and fiscal balance, "quantitative easing"
capital control / capital account liberalization

Learning Objectives & Key Review Questions

(Can you answer these, using what you learned from the readings & class slides/discussion?)

Why would a country want monetary autonomy, capital mobility, and stable exchange rates?
Very important: why can't a country have all three of those policy objectives at the same time? The "impossible trinity" or "trilemma" concept.
Describe the policy and economic conditions at work in two cases discussed in class: Zimbabwe in the early 2000s, and Sweden in 2019. What mix of trilemma policies were each pursuing? What constraints were at work in the attempts to manage their financial policy choices? What outcome ultimately occurred?
What is an 'optimal currency area,' and what conditions are required for it to be applicable, and why are those conditions necessary? Which cases best meet those standards, if any? Does the EMU (eurozone) meet that condition?
The trilemma, and a country's choices on it, is not just a domestic economic management problem -- it is an international one. Why? What features of international finance make the interactions among states on these financial policies resemble a Prisoner's Dilemma incentive mix? In that setting, what would constitute 'cooperation' and 'defection,' and why are states motivated to defect?