TY  - JOUR
AU  - Obstfeld,Maurice
AU  - Shambaugh,Jay C.
AU  - Taylor,Alan M.
TI  - Monetary Sovereignty, Exchange Rates, and Capital Controls: The Trilemma in the Interwar period
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10393
PY  - 2004
Y2  - March 2004
UR  - http://www.nber.org/papers/w10393
L1  - http://www.nber.org/papers/w10393.pdf
N1  - Author contact info:
Maurice Obstfeld
Department of Economics
University of California, Berkeley
530 Evans Hall #3880
Berkeley, CA 94720-3880
Tel: 510/643-9646
Fax: 510/642-6615
E-Mail: obstfeld@econ.berkeley.edu

Jay C. Shambaugh
McDonough School of Business
Georgetown University
542 Hariri
Washington, DC 20057
Tel: 202/687-6625
E-Mail: jcs264@georgetown.edu

Alan M. Taylor
Department of Economics
University of Virginia
Monroe Hall
Charlottesville, VA 22903
Fax: (434) 982-2904
E-Mail: alan.m.taylor@virginia.edu
AB  - The interwar period was marked by the end of the classical gold standard regime and new levels of macroeconomic disorder in the world economy. The interwar disorder often is linked to policies inconsistent with the constraint of the open-economy trilemma the inability of policymakers simultaneously to pursue a fixed exchange rate, open capital markets, and autonomous monetary policy. The first two objectives were linchpins of the pre-1914 order. As increasingly democratic polities faced pressures to engage in domestic macroeconomic management, however, either currency pegs or freedom of capital movements had to yield. This historical analytic narrative is compelling   with significant ramifications for today's world, if true   but empirically controversial. We apply theory and empirics to the interwar data and find strong support for the logic of the trilemma. Thus, an inability to pursue consistent policies in a rapidly changing political and economic environment appears central to an understanding of the interwar crises, and the same constraints still apply today.
ER  -