From impossible trinity to holy trinity

I had just written on the impossible trinitytrilemma of the European crisis.

RBI’s research conference was on another trilemma : Price Stability, Financial Stability and Sovereign Debt Sustainability.

This speech from Dr Subbarao is a must read. He says not only this is a trilemma but a situation in which all three have to be managed. Unlike other trilemmas, where you need to give up one here you have to mange all three:

We deliberated internally on whether this evolving challenge for central banks would indeed qualify as a trilemma. One view was that this is not strictly a trilemma as there is no theory which says that we cannot simultaneously obtain price stability, financial stability and sovereign debt sustainability. The opposing view was that what central banks have at hand is indeed a trilemma in as much as there can be clear tensions between the objectives underlying the new trilemma, and central banks may not be able to determine, with any degree of exactitude, what inter se priority must be accorded to each of the three objectives under different sets of circumstances. So, is this a trilemma or not? To compound the search for an answer, the word ‘trilemma’ has not made it to all standard dictionaries yet. So, permit me a little indulgence into the world of trilemmas.

He looks at a interesting history of trilemmas.

From impossible to holy trinity:

In the context of this conference, is the new trilemma – the simultaneous pursuit of price stability, financial stability and sovereign debt sustainability – a new impossible trinity? Possibly not. There is no theory which says that these objectives are inconsistent with one another. It can even be argued that the three objectives reinforce each other, and that together they sustain growth, thereby constituting not an impossible trinity, but actually a holy trinity of objectives.

2

21. That does not by any means imply that the holy trinity of objectives can always be achieved simultaneously, or once achieved, can be maintained as such indefinitely. There would be tensions and trade-offs, especially in the short-term. In particular, the tensions materialize with brutal force in a state of disequilibrium – when inflation is off target, the financial system is fragile and public debt is ballooning. To the extent we have to manage these tensions, the policy problem qualifies as a trilemma.

Hmmm..He explains in details how one leads to other and all is interconnected…

A nice speech with a super-macro perspective…

 

 

 

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