Current Issues in the Design and Conduct of Monetary Policy

IMF Working Papers, March 1, 2003

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Movements in global capital during the late 1990s and the greater emphasis on price stability led many countries to abandon fixed exchange rate regimes and to design institutions and monetary policies to achieve credibility in the goal of lowering inflation.
Freely mobile capital, independent monetary policy, and fixed exchange rates form an "impossible trinity": it is possible to have two of these policies, but not all three.
Inflation-targeting regimes being adopted by many countries provide a way of resolving this dilemma.

Shift away from fixed exchange rate regimes in many countries as a response to global capital movements and a stronger focus on price stability.
Institutional design and monetary policy reforms were aimed at achieving credibility in lowering inflation.
The "impossible trinity" (also known as the trilemma) is central to understanding policy trade-offs: policymakers can choose any two of freely mobile capital, independent monetary policy, and fixed exchange rates, but cannot simultaneously maintain all three.
Inflation targeting is presented as a viable framework for reconciling the trilemma in practice.

Subjects: Banking, Exchange rate arrangements, Exchange rates, Foreign exchange, Inflation, Inflation targeting, Monetary aggregates, Monetary policy, Money, Prices
Keywords: Africa, central bank, country, Exchange rate arrangements, Exchange rates, Global, government, Inflation, inflation targeting, inflation targeting approach, inflation targeting country, inflation targeting framework, inflation-targeting strategy, managed exchange rate regime, Monetary aggregates, monetary policy, monetary policy objective, monetary policy target, rules versus discretion, WP

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Content derived from "Current Issues in the Design and Conduct of Monetary Policy" (IMF Working Paper No. 2003/056) by Mohsin S. Khan.

Current Issues in the Design and Conduct of Monetary Policy - WP/03/56
- Current Issues in the Design and Conduct of Monetary Policy - WP/03/56 (Markdown version)
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