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Macroprudential tools, capital controls, and the trilemma: Insights from the Bretton Woods era

Eric Monnet, (2018), “Macroprudential tools, capital controls, and the trilemma: Insights from the Bretton Woods era”, VoxEU, 13 June

Assessing how domestic monetary policy is constrained by international capital flows remains a key but open empirical and theoretical question (Farhi and Werning 2014, Shambaugh and Klein 2015, Rey 2016, Obtsfeld et al. 2017). It is often approached from the angle of the trilemma – the impossible trinity of international finance – which stipulates that only capital controls are capable of ensuring the autonomy of monetary authorities’ actions in a system of fixed exchange rates. The Bretton Woods system (1946-1971) often occupies a special place in these debates, because it remains the paradigmatic case of an international monetary system where exchange rates were fixed, but where the independence of monetary policy was ensured by generalised capital controls (Ghosh and Qureshi 2016, Obstfeld and Taylor 2004, 2017). It is not surprising that the Mundell-Fleming model was framed during this period. The Bretton Woods system is also a reference point in the discourse of policymakers, used as evidence that institutionalised central bank cooperation and capital controls can provide solutions to the constraints of international finance.

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