Benjamin J.Cohen 251joint initiatives seem warranted. Net benefits, as a result, tend to be diminished
over time. Multilateral surveillance may have redeeming social value, but its stop-
go pattern makes it more costly than it might otherwise be. In a real sense we all
pay for the fickleness of policy fashion.
- THE INFLUENCE OF THE UNHOLY TRINITY
Why is international monetary cooperation so episodic? To answer that question
it is necessary to go back to first principles. Blame cannot be fobbed off on “karma,”
accidental exogenous “shocks,” or even that vague epithet “politics.” Consideration
of the underlying political economy of the issue suggests that the dilemma is, in
fact, systematic—endogenous to the policy process—and not easily avoided in
relations between sovereign national governments.
The central analytical issue, which has been well understood at least since the
pioneering theoretical work of economist Robert Mundell is the intrinsic
incompatibility of three key desiderata of governments: exchange-rate stability,
private-capital mobility, and monetary-policy autonomy. As I wrote in the
introduction to this chapter my own label for this is the “Unholy Trinity.” The
problem of the Unholy Trinity, simply stated, is that in an environment of formally
or informally pegged rates and effective integration of financial markets, any attempt
to pursue independent monetary objectives is almost certain, sooner or later, to
result in significant balance-of-payments disequilibrium, and hence provoke
potentially destabilising flows of speculative capital. To preserve exchange-rate
stability, governments will then be compelled to limit either the movement of
capital (via restrictions or taxes) or their own policy autonomy (via some form of
multilateral surveillance or joint decision-making). If they are unwilling or unable
to sacrifice either one, then the objective of exchange-rate stability itself may
eventually have to be compromised. Over time, except by chance, the three goals
cannot be attained simultaneously.
In the real world, of course, governments might be quite willing to limit the
movement of capital in such circumstances—if they could. Policymakers may
say they value the efficiency gains of free and integrated financial markets. If
polled “off the record” for their private preferences, however, most would probably
admit to prizing exchange-rate stability and policy autonomy even more. The
problem, from their point of view, is that capital mobility is notoriously difficult
to control. Restrictions merely invite more and more sophisticated forms of
evasion, as governments from Europe to South Asia to Latin America have learned
to their regret....
In practice, therefore, this means that in most instances the Unholy Trinity reduces
to a direct trade-off between exchange-rate stability and policy autonomy.
Conceptually, choices can be visualised along a continuum representing varying
degrees of monetary-policy cooperation. At one extreme lies the polar alternative
of a common currency or its equivalent—full monetary integration—where individual
governments sacrifice policy autonomy completely for the presumed benefits of a
permanent stabilisation of exchange rates. Most importantly, these benefits include