Wondering abt all those macroeconomic disputes?

In Economy on 13/07/2010 at 5:24 am

Answer: An economy cannot have its  cake and eat it. Or a country has to choose only two out of three goals ,not all three.

Various pundits and politicians, including President Obama himself, have complained that the Chinese renminbi is undervalued and impeding a global recovery. The problems in Greece have caused many people to wonder whether the euro is a failed experiment and whether Europe’s nations would have been better off maintaining their own currencies.

In thinking about these issues, the place to start is what economists call the fundamental trilemma of international finance. Yes, trilemma really is a word. It has been a term of art for logicians since the 17th century, according to the Oxford English Dictionary, and it describes a situation in which someone faces a choice among three options, each of which comes with some inevitable problems.

What is the trilemma in international finance? It stems from the fact that, in most nations, economic policy makers would like to achieve these three goals:

Make the country’s economy open to international flows of capital. Capital mobility lets a nation’s citizens diversify their holdings by investing abroad. It also encourages foreign investors to bring their resources and expertise into the country.

Use monetary policy as a tool to help stabilize the economy. The central bank can then increase the money supply and reduce interest rates when the economy is depressed, and reduce money growth and raise interest rates when it is overheated.

Maintain stability in the currency exchange rate. A volatile exchange rate, at times driven by speculation, can be a source of broader economic volatility. Moreover, a stable rate makes it easier for households and businesses to engage in the world economy and plan for the future.

But here’s the rub: You can’t get all three. If you pick two of these goals, the inexorable logic of economics forces you to forgo the third.

NYT article. Here MAS has goals1 1 and 3, M’sia. India and China has goals 2 and 3.


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