In recent times, central banks have taken a bigger role in lifting their economies out of a crisis. There is a new normal in monetary policy, from printing money and buying bonds to providing agriculture loans.
But implementing monetary policy as a central banker is no easy feat.
Controlling the price level in the economy while ensuring stable growth and a healthy financial system is a complicated role.
For onlookers, it’s easy to miss the rationale behind some of the decisions central banks take. Luckily for us, some frameworks help us understand the decision-making process in monetary policy.
One of which is the macroeconomic policy trilemma.
The impossible trinity
The trilemma, also known as the impossible trinity states that a country can only choose two of three monetary policy instruments - i) free capital mobility ii) monetary policy independence and iii) fixed exchange rates in the long term.
Let’s look at each one.