Wednesday, March 27, 2013

The Devil's Trifecta

. Wednesday, March 27, 2013

The Mundell-Fleming "unholy trinity" is that a small open economy can choose two, but not all three, presumably desirable policies: capital account openness, a fixed exchange rate, and monetary independence. Quite a lot of political economy research goes into figuring out which two countries will choose.

But what do we call it when a country chooses none of them? Cyprus right now has a closed capital account, no monetary independence, and severe limitations on external exchange at any rate.

I nominate "The Devil's Trifecta" but I'm not great at titling things so perhaps readers can do better.

This is a nice way to think about just how screwed up the EU is right now: tasked with choosing one suboptimal policy, they choose three.

But non-economists can play too! Take Rodrik's trilemma, in which states can choose two of national sovereignty, democracy, and economic integration. In Cyprus, the last is gone and the former two are questionable: it looks like democracy might win the day but it was dicey there for a minute, while Cyprus's sovereignty is restricted by the EU and faces a possible threat from Russia. So let's score it a 1.5 with a negative outlook.


Anonymous said...

Of course, Cyprus has a fixed exchange rate through its membership of the Eurozone. Or do you mean it isn't able to pursue an exchange rate target (vis-à-vis the other Eurozone member states or by controlling the euro's exchange rate vis-à-vis non-Eurozone countries)?

Kindred Winecoff said...

No, I meant that right now Cyprus has almost *no* exchange rate. That is, foreign transactions are limited, must be documented as legitimate imports, etc. The policy goal is autarky at present.

That won't last, but it's the state of things right now.

The Devil's Trifecta




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