Wednesday, July 14, 2010

Trilemma of International Finance

In a recent post, Greg Mankiw pointed to his piece published in The New York Times this past weekend. In it, he discusses what he refers to as the Trilemma of International Finance. Mankiw notes there are three goals for financial policy-makers. The trilemma arises because you can choose two, but in doing so you forfeit the third. (Doesn’t that present an interesting aspect of opportunity cost?)

Where this article can be of particular value to the classroom is during discussion about open economies, foreign exchange and policy in macroeconomics. Mankiw points out that the U.S. has opted for one combination, China for another and the Eurozone for a third. In doing so, he presents a rubric for analysis to help students understand the trade-offs inherent in policy. If you haven't already seen it, I highly recommend it.

1 comment:

nisha said...

This is an excellent thought provoking post.