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Exchange Rate Regimes in the Modern Era$
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Michael W. Klein and Jay C. Shambaugh

Print publication date: 2009

Print ISBN-13: 9780262013659

Published to MIT Press Scholarship Online: August 2013

DOI: 10.7551/mitpress/9780262013659.001.0001

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Exchange Rate Regimes and Monetary Autonomy

Exchange Rate Regimes and Monetary Autonomy

(p.133) 8 Exchange Rate Regimes and Monetary Autonomy
Exchange Rate Regimes in the Modern Era

Michael W. Klein

Jay C. Shambaugh

The MIT Press

This chapter performs tests that answer the question regarding the theory of the policy trilemma and if predictions of this theory are often borne out in practice. The chapter also looks at the modern era experiences of certain countries for discussion on whether exchange rate pegs limit monetary autonomy. The literature on the trilemma is given a brief overview, such as the work of Bordo and MacDonald is explored, particularly how it suggests that gold standard countries were flexible in their monetary policy. Empirical evidence is then analyzed and tested and shows that the policy trilemma affects economic outcomes as well, and not simply monetary policy. In conclusion, the policy trilemma theory is an appealing theoretical framework and carries vital implications on the monetary autonomy of a country.

Keywords:   policy trilemma, exchange rate pegs, monetary autonomy, Bordo, MacDonald, gold standard, monetary policy

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