The trilemma was wrong even in its original version

According to the trilemma , countries can choose only two of the following three possible objectives: a fixed exchange rate, perfect capital mobility and an independent monetary policy (with solely domestic objectives). Today, the vast majority of countries have opted for perfect capital mobility , an independent monetary policy and therefore a flexible exchange rate. This choice is now criticised , because it leads to excessive exchange rate variability related to excessive volatility in international capital flows. But even if the problem of volatility in capital flows did not exist, this choice was already wrong : an independent monetary policy , with only domestic objectives, implies that there are no monetary policy externalities, that the monetary policy chosen in one country has no effect on other countries. But there is an externality: under flexible exchange rates, an expansionary (for example) monetary policy in one country leads to a depreciation of that country’s exchange rate, which is negative for other countries. A regime of f lexible exchange rates and perfect capital mobility therefore require s monetary polic ies to be coordinated internationally, and not to be independent with solely domestic objectives, given the ir “international externalities”.