The Long and Winding Road from the International Macroeconomic Policy Trilemma to the Integrated Policy Framework

For many years the international macroeconomic policy trilemma, which argues that it is impossible to simultaneously have a pegged exchange rate, monetary independence and an open capital account, has provided a theoretical foundation for open economy macroeconomics and international monetary economics. The original form of the trilemma has been criticised and modified to suggest that its corners can be rounded and that the constraints imposed by it may be circumvented in the short run. The trilemma has also been criticised for ignoring the importance of financial stability. The most extreme allegation has been that the trilemma does not exist at all because flexible exchange rates do not provide effective insulation from a global financial cycle and that therefore countries only have a choice between monetary autonomy and capital controls. Much of the research in international monetary economics since the inception of the trilemma has tended to focus on its key elements, particularly in terms of exchange rate policy and capital controls, in a world that exhibits increasing financial globalisation. The research agenda recently embarked upon by the International Monetary Fund under the umbrella of the Integrated Policy Framework (IPF) concentrates on how countries should respond to the volatility of international capital flows. This article provides a summary of the evolution of international monetary economics in the context of the trilemma, as well as a measured and constructive critique of the IPF. In so doing, it assesses the current state and future direction of open economy macroeconomics and international monetary economics.