Question

. The trilemma states that policymakers must choose among the following policy goals: Fixed exchange rates,...

. The trilemma states that policymakers must choose among the following policy goals:

Fixed exchange rates, monetary autonomy and capital mobility. Which of the above goals is the least important to policymakers under the following exchange rate systems:

a. Gold standard

b. Bretton woods

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Answer #1

1) Under Gold standard the values of currencies are fixed against the price of Gold so that exchange rate is fixed. Capital is allowed to move from country to country. Now given these two conditions, the third condition of central bank autonomy is compromised because it has to intervene everytime exchange rate deviates from its value due to committment towards fixed exchange rate. Hence the least important was central bank's autonomy

2) Bretton woods had fixed capital mobility because it attempted to restrict movement of capital between countries while maintaining pegged exchanged rates and independent monetary authority. Hence capital mobility was the least important to policymakers.

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