Trilemma of international finance Assignment Essay

Trilemma of international finance Assignment Essay

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Type	Essay
Writer Level	Masters
Style	APA
Sources/References	4
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Trilemma of international finance Assignment Essay

The trilemma of international finance, also known as the impossible trinity, is a concept in international economics that states that a country cannot simultaneously have the following three policies:

• A fixed exchange rate. This means that the country’s currency is pegged to another currency or a basket of currencies.
• Free capital mobility. This means that there are no restrictions on the movement of capital into and out of the country.
• An independent monetary policy. This means that the country’s central bank has the ability to set interest rates and other monetary policy tools without being constrained by the exchange rate.

The trilemma is a result of the fact that these three policies are mutually exclusive. For example, if a country has a fixed exchange rate and free capital mobility, then it cannot have an independent monetary policy. This is because if the central bank raises interest rates, it will attract capital inflows, which will put upward pressure on the exchange rate. To maintain the fixed exchange rate, the central bank would have to sell foreign currency reserves or raise interest rates even further. This would lead to a contractionary monetary policy, which would hurt the economy.

The trilemma has important implications for countries’ economic policies. Countries that choose to have a fixed exchange rate and free capital mobility must give up their ability to have an independent monetary policy. This can be a problem if the country’s economy is hit by a shock, such as a recession or a financial crisis. In these cases, the central bank will not be able to use monetary policy to stimulate the economy or to stabilize the financial system.

Countries that choose to have an independent monetary policy and free capital mobility must give up their ability to have a fixed exchange rate. This can be a problem if the country’s economy is integrated with the global economy. In these cases, changes in interest rates in other countries can have a significant impact on the country’s own economy.

The trilemma is a complex issue with no easy solutions. Countries must weigh the benefits and drawbacks of each policy option and decide which combination is best for their own economy.

The three states of the trilemma

The trilemma can be represented by three states, each of which is characterized by a different combination of the three policies. These states are:

• State 1: Fixed exchange rate, free capital mobility, and no independent monetary policy. This is the classic “impossible trinity” state. In this state, the central bank is unable to set interest rates independently, as it must do whatever is necessary to maintain the fixed exchange rate.
• State 2: Floating exchange rate, free capital mobility, and independent monetary policy. This state is characterized by a floating exchange rate, which means that the currency is allowed to fluctuate freely in the market. In this state, the central bank has the ability to set interest rates independently, without being constrained by the exchange rate.
• State 3: Fixed exchange rate, limited capital mobility, and some independent monetary policy. This state is a compromise between the other two states. In this state, the central bank has some ability to set interest rates independently, but it is limited by the need to maintain the fixed exchange rate.

The choice of state

The choice of which state to adopt depends on a number of factors, including the country’s economic structure, its trade and financial linkages with other countries, and its political goals. For example, countries that are highly integrated with the global economy may choose to adopt State 2, in order to be able to set interest rates independently. However, countries that are more concerned about maintaining price stability may choose to adopt State 1, even if it means giving up some independence in monetary policy.

The trilemma and the eurozone

The trilemma has important implications for the eurozone. The eurozone is a monetary union, which means that its members have a single currency, the euro. This means that the eurozone countries have given up their ability to have independent monetary policies. However, they still have free capital mobility, which means that they are subject to the trilemma.

The trilemma has led to some challenges for the eurozone. For example, during the financial crisis of 2008, some eurozone countries were hit by capital outflows, which put downward pressure on their exchange rates. This made it difficult for these countries to stimulate their economies through monetary policy.

The trilemma is a complex issue with no easy solutions. However, it is important for eurozone countries to be aware of the trilemma and its implications for their economic policies.

Conclusion

The trilemma of international finance is an important concept in international economics. It helps to explain the trade-offs that countries face when making decisions about their monetary and exchange rate policies. The trilemma is a complex issue, but it is an important one for countries to understand

Trilemma of international finance Assignment Essay

RUBRIC QUALITY OF RESPONSE NO RESPONSE POOR / UNSATISFACTORY SATISFACTORY GOOD EXCELLENT Content (worth a maximum of 50% of the total points) Zero points:  Student failed to submit the final paper. 20 points out of 50:  The essay illustrates poor understanding of the relevant material by failing to address or incorrectly addressing the relevant content; failing to identify or inaccurately explaining/defining key concepts/ideas; ignoring or incorrectly explaining key points/claims and the reasoning behind them; and/or incorrectly or inappropriately using terminology; and elements of the response are lacking. 30 points out of 50:  The essay illustrates a rudimentary understanding of the relevant material by mentioning but not full explaining the relevant content; identifying some of the key concepts/ideas though failing to fully or accurately explain many of them; using terminology, though sometimes inaccurately or inappropriately; and/or incorporating some key claims/points but failing to explain the reasoning behind them or doing so inaccurately.  Elements of the required response may also be lacking. 40 points out of 50:  The essay illustrates solid understanding of the relevant material by correctly addressing most of the relevant content; identifying and explaining most of the key concepts/ideas; using correct terminology; explaining the reasoning behind most of the key points/claims; and/or where necessary or useful, substantiating some points with accurate examples.  The answer is complete. 50 points:  The essay illustrates exemplary understanding of the relevant material by thoroughly and correctly addressing the relevant content; identifying and explaining all of the key concepts/ideas; using correct terminology explaining the reasoning behind key points/claims and substantiating, as necessary/useful, points with several accurate and illuminating examples.  No aspects of the required answer are missing. Use of Sources (worth a maximum of 20% of the total points). Zero points:  Student failed to include citations and/or references. Or the student failed to submit a final paper. 5 out 20 points:  Sources are seldom cited to support statements and/or format of citations are not recognizable as APA 6th Edition format. There are major errors in the formation of the references and citations. And/or there is a major reliance on highly questionable. The Student fails to provide an adequate synthesis of research collected for the paper. 10 out 20 points:  References to scholarly sources are occasionally given; many statements seem unsubstantiated.  Frequent errors in APA 6th Edition format, leaving the reader confused about the source of the information. There are significant errors of the formation in the references and citations. And/or there is a significant use of highly questionable sources. 15 out 20 points:  Credible Scholarly sources are used effectively support claims and are, for the most part, clear and fairly represented.  APA 6th Edition is used with only a few minor errors.  There are minor errors in reference and/or citations. And/or there is some use of questionable sources. 20 points:  Credible scholarly sources are used to give compelling evidence to support claims and are clearly and fairly represented.  APA 6th Edition format is used accurately and consistently. The student uses above the maximum required references in the development of the assignment. Grammar (worth maximum of 20% of total points) Zero points:  Student failed to submit the final paper. 5 points out of 20:  The paper does not communicate ideas/points clearly due to inappropriate use of terminology and vague language; thoughts and sentences are disjointed or incomprehensible; organization lacking; and/or numerous grammatical, spelling/punctuation errors  10 points out 20:  The paper is often unclear and difficult to follow due to some inappropriate terminology and/or vague language; ideas may be fragmented, wandering and/or repetitive; poor organization; and/or some grammatical, spelling, punctuation errors 15 points out of 20:  The paper is mostly clear as a result of appropriate use of terminology and minimal vagueness; no tangents and no repetition; fairly good organization; almost perfect grammar, spelling, punctuation, and word usage. 20 points:  The paper is clear, concise, and a pleasure to read as a result of appropriate and precise use of terminology; total coherence of thoughts and presentation and logical organization; and the essay is error free. Structure of the Paper (worth 10% of total points) Zero points:  Student failed to submit the final paper. 3 points out of 10: Student needs to develop better formatting skills. The paper omits significant structural elements required for and APA 6th edition paper. Formatting of the paper has major flaws. The paper does not conform to APA 6th edition requirements whatsoever. 5 points out of 10: Appearance of final paper demonstrates the student’s limited ability to format the paper. There are significant errors in formatting and/or the total omission of major components of an APA 6th edition paper. They can include the omission of the cover page, abstract, and page numbers. Additionally the page has major formatting issues with spacing or paragraph formation. Font size might not conform to size requirements.  The student also significantly writes too large or too short of and paper 7 points out of 10: Research paper presents an above-average use of formatting skills. The paper has slight errors within the paper. This can include small errors or omissions with the cover page, abstract, page number, and headers. There could be also slight formatting issues with the document spacing or the font Additionally the paper might slightly exceed or undershoot the specific number of required written pages for the assignment. 10 points: Student provides a high-caliber, formatted paper. This includes an APA 6th edition cover page, abstract, page number, headers and is double spaced in 12’ Times Roman Font. Additionally, the paper conforms to the specific number of required written pages and neither goes over or under the specified length of the paper.
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