This paper proposes that the Mundellian Trilemma remains valid despite the emergence of a world financial cycle. A clear distinction must be made between monetary policy independence and insulation of an open economy’s financial system. A flexible exchange rate allows an optimizing central...

This article offers a theory‐based explanation for why high‐ interest‐rate countries see their currencies appreciate, the so‐called UIP puzzle. The central bank bases its target rule on the lag of the policy instrument and the CPI inflation rate. When combined with a stylised model of an...