International Relations in Europe Lecture 29 Lecture 29: Monetary Policies. Monetary policy: o Central banks control monetary supply; one of the ways they can do this is through the interest rates on its customers. Interest Rates: the interest rates of the banks, influence the interest rates of the economy these banks have a longterm influence on interest rates. Maximum Employment: two of the things these banks want to do is: maximize employment and control inflation. They control inflation rates through increasing the interest rates because then it becomes more expensive to borrow money, so companies are less likely to invest and people are less likely to spend. The MundellFleming Trilemma: o According to this theory, a country cannot achieve a free flow of capital, a fixed exchange rate and independent monetary policy simultaneously. The MundellFlemming Trinity: 1. Autonomy: managing the business cycle. 2. Minimum exchange rate stability. o Theres a tension between managing the business cycle (issuing government bonds) and maintaining the exchange rates.