Reference no: EM1350294

Policymakers around the world often face what Obstfeld and Taylor dubbed a "policy trilemma":

• they want to fix the nominal exchange rate, in order to stabilize the price level;

• they want capital mobility for efficiency and flexibility purposes;

• they want to engage in active monetary policy for output stabilization purposes.

Using the concepts you have learned in class, explain in detail why this is a "trilemma", i.e.

Explain why only two of the three objectives can be achieved at any point in time.