The International Law and Politics of the Financial and Monetary System
Chapter 2: The Trilemma
In this chapter, we move into the world of two states. This simplified world allows us to explore how states make foreign economic policy by establishing an exchange rate between their currency and other currencies. We examine the balance of payments, an economic instrument that provides an in-depth look into the competitive advantage of states. We investigate whether free markets are capable of determining the ‘right’ exchange rate between currencies. We scrutinize how states intervene in the market to manipulate their currencies and increase their exports at the expense of other states. This chapter analyzes in great detail the concept of Trilemma: that states cannot maintain, at the same time, an independent domestic economic policy and a stable exchange rate, when capital is free to hop from state to state.
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