Current Issues in the Design and Conduct of Monetary Policy

In the past decade there have been important changes in the design and conduct of monetary policy around the world. Movements in global capital during the late 1990s and the greater emphasis on price stability forced many countries to abandon fixed exchange rate regimes and to design institutions and monetary policies to achieve credibility in the goal of lowering inflation. Such recent deve lopments have brought to the forefront the idea that freely mobile capital, independent monetary policy, and fixed exchange rates form an “impossible trinity.” It is possible to have two of these policies, but not all three. Paper prepared for the RBI/IGIDR Fifth Annual Conference on Money and Finance in the Indian Economy, Mumbai, India, January 30–February 1, 2003. 1 I am grateful to Enzo Croce and Hugo Juan-Ramon for their contributions to this paper. The views expressed in the paper are my sole responsibility and do not necessarily reflect the opinions of the International Monetary Fund.