DESPITE occasional manifestations of disappointment and distrust, the globalization of economic life is now almost taken for granted. Nowhere has this trend been more pervasive than in global financial markets in the past few decades. Capital flows have surged in volume, in both the developed and the developing world, creating new opportunities for economic benefit and difficult challenges for policymakers. The dust has by no means settled.
It may surprise some readers to learn that the paragraph above describes not only 2004 but also 1904, during the era of globalization that spanned the years 1870 to 1914. The striking parallels between that era and the current era of globalization have been described in many recent studies. These parallels raise a number of questions about the evolution of the global economy in the 19th century, its collapse in 1914, and the rebirth of globalization at the end of the 20th century.
With Maurice Obstfeld (University of California, Berkeley), I have explored these events systematically, which resulted in our new economic history of global capital markets and the attendant political-economy problems. We found that economic policymaking has, throughout, been characterized by a fundamental macroeconomic policy trilemma that all governments face. That is, it is not possible for a government simultaneously to peg the exchange rate, keep an open capital market, and enjoy monetary policy autonomy. In this article, I synthesize our evidence for the pervasiveness of the trilemma and draw lessons for today’s policymakers.
Policymakers in two eras of globalization faced the same “trilemma” of difficult policy trade-offs
Alan M. Taylor