Question

What shape should the international financial architecture take? How can the international monetary trilemma or the financial trilemma be addressed?

Answer 1

Since this is a theoritical and a subjective question- my answer will be subjective to my readings and can differ as per readings and their authors.First of all- international Financial architecture is basically the organisational and regulatory arrangements that controls economic activity across international borders- since all countries are connected by the global economic trades and cross country fund flows- it becomes imperative to have an system or "architecture" in place.

Following several crises- Asian crises of 1997-98, and Financial crises 2007-08 mainly- several actions wre taken to alter it:
1. Detecting and monitoring External Vulnerability
2. Regulating Capital Flows
3.Adherence to international standards and codes

4.regulation of exchange rate volatality

5.Reform the international monetary bodies

6. Increasing Transpareny

and many other subject to things that can improve the crises situation.

The international Monetary Trillema- anlso called the impossible trinity or Mundell - Fleming trilemma- is said to have all three at the same time- a fixed exchange rate,a free capital flow and a Sovereign monetary policy in place- something which is deemed as impossible as having two eliminates the opportunity of having the third.

According to the model a country has three options-
1. keep a fixed exchage rate between its currency and another while allowing free cross border capital flow
2. allow free capital flow and its own monetary policy

3. own monetary policy and fixed excahge rate