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International Political Economy #11

The Politics of the Trilemma

W. K. Wineco | IPE #11: Trilemma

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William Kindred Wineco
Indiana University Bloomington

October 8, 2013

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Coming out of WWII countries wanted:

Stable exchange rates to facilitate trade. Open capital markets to facilitate investment. Policymaking exibility to meet demands from democratic polities.
The problem? You cant have all three. Only two.

W. K. Wineco | IPE #11: Trilemma

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W. K. Wineco | IPE #11: Trilemma

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The Pre-WWII System

The gold standard emphasized xed exchange rates and free capital mobility. This left governments with few policy tools to combat recessions.

The gold standard was inherently unstable because of the disjunction between domestic politics and international politics. The gold standard was a managed system: prices of currencies were not set by the market.

W. K. Wineco | IPE #11: Trilemma

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The 1945-1973 System

Fixed exchange rates and independent monetary policy, but no capital mobility. Good for labor in industrialized economies; bad for the developing world. (More on Thursday. The post-1973 system comes next week.)

W. K. Wineco | IPE #11: Trilemma

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Finance and Trade

Finance exists to facilitate trade.

Just as trade benets some groups, each of these outcomes benet some and hurt others. Thus, they are politically contentious.

They also each contain processes that can lead to crisis.

After crises, we often get reforms that shift the policy mix.

W. K. Wineco | IPE #11: Trilemma

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A Political Trilemma?

W. K. Wineco | IPE #11: Trilemma

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Except for One

The n - 1 condition: in a world of n countries, there are n - 1 bilateral exchange rates. This means that one country the core country can have all three of stable exchange rates, monetary independence, and open capital movements. This means that one country the core country can have an independent nation state, deep economic integration, and democratic politics. The US was in a position to make itself that country after World War II. In doing so, it embedded itself at the core of global economic networks. This both reected and enhanced American power: exorbitant privilege.

W. K. Wineco | IPE #11: Trilemma

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