The “trilemma” that led to Gopinath’s rise to the IMF
In economics, what is possible should never be capped too early. Two weeks ago, the chief economist of the International Monetary Fund (IMF) Gita Gopinath was due to resume his academic career at Harvard next year. Now she is heading for a management position at the IMF as first deputy to Managing Director Kristalina Georgieva, who described her as “the right person at the right time”. It’s a cliché that is not only true, but that matters. As central banks attempt to stem and absorb the money they have spent to save economies from Covid choking, global currency and asset markets expect upheaval. and advice from the Fund. Unlike, say, 1997, when caught off guard, emerging economies can count on aid that actually works, thanks to their subtle abandonment of a crucial aspect of the “Washington Consensus” after The Great Recession in Canada. ‘West. The likely role Gopinath’s work played in this policy review can be gauged by his rise to the IMF.
Amartya Sen used Arrow’s Impossibility Theorem to prove that a society does not need to sacrifice free and well-ordered social choices to ensure consistency with a minimum set of welfare conditions if we can use data on how we are all relatively positioned. In a more modest and practical exercise, Gopinath placed an Impossible Trinity under his lens and found empirical data that undermined his binary options trio. The trilemma? An economy can only opt for two of these three policies: open capital markets, monetary parity and monetary autonomy. As globalization meant choosing either of the latter two, a currency float was standard advice for any central bank to bring domestic growth and inflation under control. In India, however, we have been doing well with the fuzzy parameters since we opened up our economy. We slowly but partially lifted our restrictions on the inflow and outflow of money, floated the rupee with buoys and weights as stabilizers, and called on our monetary authority to help expand production without losing stability. overall price. Large capital inflows are straining this complex formula. An increase in the rupee against the US dollar may stunt export growth, but restraining its rise by buying dollars could prove inflationary, unless the resulting liquidity is absorbed by bond sales. which could increase the local cost of credit. Likewise, a sustained rupee in the face of cash outflows can also interfere with money supply and bond yields. Since monetary policy can be weakened by foreign forces, the trilemma cannot be ruled out, as Gopinath has often said; however, what a country finds optimal can indeed vary in nuance beyond the framework of possibility of its three choices either-or.
Gopinath’s analysis of global trends in a globalized world has shown how the gains from a fully flexible exchange rate actually are for most countries, with trade elasticity not doing its job of adjusting the exchange rate. Marlet. For this, we should blame not only the effect of exports valued in de facto dollars, with exporters acting as shock absorbers / gains, but also large waves of foreign capital invested in assets that can overwhelm the impact of spreads. trading on exchange rates. Either way, this departure from the “Chicago School” free market paradigm justifies what was once frowned upon: capital knobs and managed floats. And the IMF finally seems open to a broader framework of possibilities.
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