ECN 220 Lecture Notes - Lecture 4: Capital Control, Impossible Trinity, Money Creation

• School: Ryerson University
• Department: Economics
• Course: ECN 220
• Professor: Michael Jolly

Document Summary

Deiniions: fiscal policy, fiscal expansion, fiscal contracion (austerity, budget balance- deicit, surplus. Link between fiscal policy and the balance of payments: we have already studied the twin deicit hypothesis". The trilemma" (also called the impossible trinity") states that a country cannot achieve the following three objecives at the same ime: (1) a ixed exchange rate (2) free internaional movement of inancial capital (3) an independent monetary policy. Capital controls would have to be imposed to prevent capital from leeing the country in search of higher interest rates. (3) have an independent monetary policy and allow free capital mobility. The exchange rate would have to be allowed to loat. In today"s economy many countries (paricularly smaller ones) prefer ixed exchange rates because their foreign debt is denominated in a foreign currency (e. g. the us dollar) It is diicult to control capital lows in a globalized economy. As a result countries have less ability to pursue independent monetary policies.