Can the Monetary Policy Trilemma be solved? Initial findings from an Agent-based Model


  • Picture of Vishal Wilde FRSA
    Vishal Wilde FRSA
    Civil Servant (Fast Stream), Researcher, Trade Unionist, Politician, and Creative Writer.
  • Economics and Finance
  • Fellowship

Vishal has previously written on Monetary Policy Theory and Reform for think tanks such as the Cobden Centre, the Adam Smith Institute and the Center for a Stateless Society (C4SS).

Amidst a backdrop of intensified debate surrounding monetary policy, it is worth exploring the potential for economies with ‘multiple monies’ to achieve desirable outcomes.

For the MSc Project component of my MSc in Advanced Computer Science with Internet Economics at the University of Liverpool, I developed an Agent-based Model (ABM) using Python and MESA (an ABM framework) to simulate and explore whether having co-existing / competing ‘Multiple Monies’ in an economy could solve the Monetary Policy Trilemma. It is available on the Social Science Research Network (SSRN) repository of Working Papers entitled ‘Agents with Multiple Monies: Can the Monetary Policy Trilemma Be Solved?’.

The ‘Monetary Policy Trilemma’ (known variously as ‘the Trilemma’, the ‘Mundell-Fleming trilemma’, the ‘Unholy trinity’, and ‘the Impossible Trinity’) is a fundamental problem in (and central thesis of) International Macroeconomic theory. In a nutshell, it states that a country and its policy makers cannot simultaneously pursue (and achieve) these three desirable policy objectives:

  1. Free movement of capital (no capital controls).
  2. A fixed foreign exchange rate.
  3. An ‘independent’ monetary policy (also referred to as a ‘sovereign’ monetary policy or ‘monetary autonomy’).

It is based upon the Mundell-Fleming model and was empirically tested by Obstfeld and Taylor in 1997 as well as Obstfeld, Shambaugh and Taylor 2004. More recently, some scholars have sought to argue that the Trilemma can be practically reduced to a ‘dilemma’, but this characterisation has not been widely accepted. Do let me know if you would like the citations for this section, as I can provide these for interested parties.

Nonetheless, for the purposes of my simulation, I programmed no capital controls (i.e. free movement of capital) and I tested whether fixed foreign exchange rates as well as independent monetary policies are concurrently attainable. All other things equal, a key finding was that ‘the Trilemma’ can be solved. The test for a fixed exchange rate between time steps remains at +/- 1%.

Monetary autonomy is tested in an ‘extreme’ fashion through a form of ‘Helicopter Money’ that is implemented part way through each simulation and at each time step of each simulation since money-suppliers are capable of autonomously expanding money supply with no restrictions to pursue, fulfil and optimise their preferences. Although more monies in the system decreases the ‘success rate’ (i.e. the rate at which monetary autonomy can co-exist with fixed exchange rates in the absence of capital controls), they increase a conceptualisation of economic growth in this system. Moreover, I found that, in this system, 'higher economic growth is correlated with less inequality', which agrees with the suggestion that inequality may constrain economic growth. However, an alternative interpretation of these initial findings are that the Trilemma should not even exist at all (especially if there is/was free movement of capital).

The ABM is also generalisable and extensible. It can apply to economies broadly defined; that is, cities, conurbations, regions, countries, multiple countries, industries, continents, the world, transnational communities and more besides. Of course, this simulation could be far more sophisticated but these initial findings should still provide some food for thought in debates about monetary policy.

When considering future monetary paradigms and systems, the intellectual space for economic theory is greater than ever before owing to the potential for computational, scientific simulations to explore the potential properties of those systems (even if we can ultimately only provide approximations rather than a completely accurate likeness of reality).

In addition to his other written work, Vishal has submitted written evidence to the 2017 House of Commons Treasury Select Committee’s Inquiry on the 'Effectiveness and impact of post-2008 UK monetary policy'.

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