Hostname: page-component-cd9895bd7-lnqnp Total loading time: 0 Render date: 2024-12-25T19:06:56.591Z Has data issue: false hasContentIssue false
  • English
  • Français

The trade-offs between macroeconomics, political economy and international relations

Published online by Cambridge University Press:  10 July 2019

Michael Bordo  and
Harold James
Michael Bordo
Affiliation:
Rutgers University, Hoover Institution and NBER
Harold James*
Affiliation:
Princeton University and IMF
*
H. James (corresponding author), Princeton University, 218 Dickinson Hall, Princeton, NJ08544-1013, USA; email: hjames@princeton.edu
Get access Rights & Permissions [Opens in a new window]

Abstract

This article explains the problem of adjustment to the challenges of globalization in terms of the logic underpinning four distinct policy constraints, or trilemmas, and their interrelationship, and in particular the disturbances that arise from capital flows. The analysis of a policy trilemma was developed first as a diagnosis of exchange rate problems (the incompatibility of free capital flows with monetary policy autonomy and a fixed exchange rate regime); but the approach can be extended. The second trilemma we describe is the incompatibility between financial stability, capital mobility and national policy choice over exchange rates. The third example extends the analysis to politics, and looks at the strains in reconciling democratic politics with monetary autonomy and capital movements. Finally, we examine the security aspect and look at the interactions of democracy with capital flows and international order. The trilemmas, in short, depict the way that domestic monetary, financial, economic and political systems are interconnected with the international order, or the impossible policy choices at the heart of globalization. Frequently, the trilemmas conjure up countervailing anti-globalization tendencies and trends.

Keywords

capital flowsbanking crisesfinancial crisesmonetary policydemocracyinternational ordertrilemma

JEL classification

E40: General E50: General F30: General E52: Monetary Policy F40: General E44: Financial Markets and the Macroeconomy E43: Interest Rates: Determination, Term Structure, and Effects
Type
The past mirror: notes, surveys, debates
Information
Financial History Review , Volume 26 , Issue 3 , December 2019 , pp. 247 - 266
Check for updates
Copyright
Copyright © European Association for Banking and Financial History e.V. 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

The authors thank the editor and one referee for useful comments.

References

REFERENCES

Balderston, T. (1993). The Origins and Course of the German Economic Crisis: November 1923 to May 1932. Berlin: Haude & Spener.Google Scholar
Bhagwati, J. (2004). In Defense of Globalization. New York: Oxford University Press.Google Scholar
Bloomfield, A. (1959). Monetary Policy under the International Gold Standard, 1880–1914. New York: Federal Reserve Bank.Google Scholar
Borchardt, K. (1991). Perspectives on Modern German Economic History and Policy. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Bordo, M. D. and Meissner, C. M. (2017). Growing up to financial stability? Financial globalization, financial development, and financial crises. In Rousseau, P. L. and Wachtel, P. (eds.), Financial Systems and Economic Growth: Credit, Crises, and Regulation from the 19th Century to the Present. New York: Cambridge University Press.Google Scholar
Bordo, M. D. and Rockoff, H. (1996). The gold standard as a ‘good housekeeping seal of approval’. Journal of Economic History, 56(2), pp. 389–428.CrossRefGoogle Scholar
Borio, C., James, H. and Shin, H. S. (2014). The international monetary and financial system: A capital account historical perspective. BIS Working Paper 457.CrossRefGoogle Scholar
Brunnermeier, M., Doshi, R. and James, H. (2018). Beijing's Bismarckian ghosts: how great powers compete economically. Washington Quarterly, 41(3), pp. 161–76.CrossRefGoogle Scholar
Cortes Conde, R. (1989). Dinero, deuda y crisis: evolucion fiscal y monetaria en la Argentina, 1862–1890. Buenos Aires: Editorial Sudamericana Instituto Torcuato.Google Scholar
Davis, L. E. and Gallman, R. E. (2001). Evolving Financial Markets and International Capital Flows: Britain, the Americas and Australia: 1865–1914. New York: Cambridge University Press.CrossRefGoogle Scholar
Della Paolera, G. and Taylor, A. M. (2007). Straining at the Anchor: The Argentine Currency Board and the Search for Macroeconomic Stability, 1880–1935. Chicago: University of Chicago Press.Google Scholar
Dooley, M. (2000). A model of crises in emerging markets. Economic Journal, 110, pp. 256–72.CrossRefGoogle Scholar
Echeverria, C., Darbar, S. M. and Johnston, R. B. (1997). Sequencing capital account liberalization: lessons from the experiences in Chile, Indonesia, Korea, and Thailand. IMF Working Paper 97/157.CrossRefGoogle Scholar
Eichengreen, B. (1992). Golden Fetters: The Gold Standard and the Great Depression, 1919–1939. New York: Oxford University Press.Google Scholar
Eichengreen, B. (1996). Globalizing Capital: A History of the International Monetary System. Princeton, NJ: Princeton University Press.Google Scholar
Ferguson, N. (1999). The House of Rothschild, vol. 1: Money's Prophets: 1798–1848. New York: Penguin.Google Scholar
Ferguson, N. and Schularick, M. (2006). The empire effect: the determinants of country risk in the first age of globalization, 1880–1913. Journal of Economic History, 66(2), pp. 283–312.CrossRefGoogle Scholar
Fernandez-Villaverde, J., Garicano, L. and Santos, N. (2013). Political credit cycles: the case of the Eurozone. Journal of Economic Perspectives, 27(3), pp. 145–66.CrossRefGoogle Scholar
Flandreau, M. and Zumer, F. (2004). The Making of Global Capital 1880–1913. Paris: OECD Development Centre Studies.Google Scholar
Ford, A. G. (1962). The Gold Standard 1880–1914: Britain and Argentina. Oxford: Oxford University Press.Google Scholar
Funke, M., Schularick, M. and Trebesch, C. (2016). Going to extremes: politics after financial crises, 1870–2014. European Economic Review, 88(C), pp. 227–60.CrossRefGoogle Scholar
Haber, S. H. and Calomiris, C. W. (2014). Fragile by Design: The Political Origins of Banking Crises and Scarce Credit. Princeton, NJ: Princeton University PressGoogle Scholar
Ikenberry, G. J. (2001). After Victory: Institutions, Strategic Restraint, and the Rebuilding of Order after Major Wars. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
James, H. (1986). The German Slump: Politics and Economics 1924–1936. Oxford: Oxford University Press.Google Scholar
James, H. (1998). Die Reichsbank 1876 bis 1945. Bundesbank, Deutsche (ed.), Fünfzig Jahre Deutsche Mark: Notenbank und Währung in Deutschland seit 1948, Munich: C. H. Beck.Google Scholar
Kalaitzidis, A. (2009). Europe's Greece: A Giant in the Making. New York: Palgrave-Macmillan.Google Scholar
Kayser, M. A. (2009). Partisan waves: international business cycles and electoral choice. American Journal of Political Science, 53(4), pp. 950–70.CrossRefGoogle Scholar
Keohane, R. O., Macedo, S. and Moravcsik, A. (2009). Democracy-enhancing multilateralism. International Organization, 63, pp. 1–31.CrossRefGoogle Scholar
Kindleberger, C. P. (1986 [1973]). The World in Depression 1929–1939, 2nd edn. Berkeley: University of California Press.Google Scholar
Krugman, P. (1999). Balance sheets, the transfer problem and financial crises. Mimeo, Princeton University.CrossRefGoogle Scholar
Lynn, M. (2011). Bust: Greece, the Euro, and the Sovereign Debt Crisis. Hoboken, NJ: Bloomberg Press.Google Scholar
Marsh, D. (2011). The Euro: The Battle for the New Global Currency. New Haven, NJ: Yale University Press.Google Scholar
Meissner, C. M. (2005). A new world order: explaining the international diffusion of the gold standard, 1870–1913. Journal of International Economics, 66, pp. 385–406.CrossRefGoogle Scholar
Mitchener, K. J. and Weidenmier, M. (2008). Trade and empire. Economic Journal, 118, pp. 1805–34.CrossRefGoogle Scholar
Mundell, R. A. (1963). Capital mobility and stabilization policy under fixed and flexible exchange rates. Canadian Journal of Economic and Political Science, 29(4), pp. 475–85.CrossRefGoogle Scholar
Obstfeld, M., Shambaugh, J. C. and Taylor, A. M. (2005). The trilemma in history: tradeoffs among exchange rates, monetary policies, and capital mobility. Review of Economics and Statistics, 87(3), pp. 423–38.CrossRefGoogle Scholar
Obstfeld, M. and Taylor, A. M. (2004). Global Capital Markets: Integration, Crisis and Growth. New York and Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Padoa-Schioppa, T. (1982/1994). Capital mobility: why is the treaty not implemented? Reprinted in Padoa-Schioppa, T. (ed.) (1994), The Road to Monetary Union in Europe. Oxford: Clarendon Press.Google Scholar
Polanyi, K. (1944). The Great Transformation. New York: Farrar and Rinehart.Google Scholar
Rey, H. (2013). Dilemma not trilemma: the global financial cycle and monetary policy independence. Jackson Hole Presentation, August.Google Scholar
Rodrik, D. (2000). How far will international economic integration go? Journal of Economic Perspectives, 14(1), pp. 177–86.CrossRefGoogle Scholar
Rodrik, D. (2007). The inescapable trilemma of the world economy. In http://rodrik.typepad.com/dani_rodriks_weblog/2007/06/the-inescapable.htmlGoogle Scholar
Rodrik, D. (2011). The Globalization Paradox: Democracy and the Future of the World Economy. New York: Norton.Google Scholar
Schnabel, I. (2004). The twin German crisis of 1931. Journal of Economic History, 64, pp. 822–71.CrossRefGoogle Scholar
Schoenmaker, D. (2011). The financial trilemma. Economics Letters, 111, pp. 57–9.CrossRefGoogle Scholar
Schuker, S. A. (1988). American ‘Reparations’ to Germany, 1919-33: Implications for the Third World Debt Crisis. Princeton, NJ: International Finance Section, Department of Economics, Princeton University.Google Scholar
Schularick, M. and Taylor, A. M. (2012). Credit booms gone bust: monetary policy, leverage cycles, and financial crises, 1870–2008. American Economic Review, 102(2), pp. 1029–61.CrossRefGoogle Scholar
Siegel, J. (2014). For Peace and Money: French and British Finance in the Service of Tsars and Commissars. New York: Oxford University Press.CrossRefGoogle Scholar
Stiglitz, J. (1998). Boats, planes and capital flows. Financial Times, 25 March.Google Scholar
Sylla, R., Legler, J. B. and Wallis, J. J. (1987). Banks and state public finance in the New Republic. Journal of Economic History, 47, pp. 391–403.CrossRefGoogle Scholar
Taylor, A. M. (2003). Capital accumulation. In della Paolera, G. and Taylor, A. M. (eds.), A New Economic History of Argentina. Cambridge: Cambridge University Press.Google Scholar
Tornell, A. and Velasco, A. (1992). The tragedy of the commons and economic growth: why does capital flow from poor to rich countries? Journal of Political Economy, 100(6), pp. 1208–31.CrossRefGoogle Scholar
Williamson, J. (1996). Globalization, convergence, and history. Journal of Economic History, 56(2), pp. 277–306.CrossRefGoogle Scholar