A reconcilable duo

Abstract

Passari and Rey (2015) have proposed that the impossible trinity no longer applies and offer, instead, an 'irreconcilable duo'. That is, independent of the exchange rate regime, it is not possible to sustain autonomous monetary policy and perfect capital mobility at the same time. We suggest otherwise within a stock-flow-consistent framework. Identities and definitions are manipulated to write down a series of dynamic systems models. The policy parameters are the tax rates in the 'domestic' and the 'foreign' country, the rates of interest on government bills, the rates of interest charged by commercial banks at home and abroad, and the cash ratios in both countries. Different institutional mixes offer different combinations of the control variables to deliver stability of the state vector.