Monetary policy efficiency in terms of financial globalization

Sa？etak The paper analyzes the standard textbook Mundell-Fleming trilemma of monetary policy in the context of new ？dilemma“ (Rey 2015) and ？quadrilemma“ hypotheses. The ？dilemma“ hypothesis questions the relevance of the exchange rate regime for monetary policy efficacy due to the existence of the global financial cycle, while the ？quadrilemma“ hypothesis implies that high foreign currency reserves enable a higher degree of monetary sovereignty, regardless of the exchange rate regime. The paper also aims to offer an alternative explanation for the existence of the global financial cycle, based on Eichengreen′s et al. (2007) ？original sin“ hypothesis. According to the alternative explanation, the synchronization of financial cycles is a consequence of the conscious choice of maintaining the exchange rate fixed in terms of a currency mismatch in financial assets and liabilities within a country. A high degree of exchange rate exposure (more foreign currency liabilities than assets) decreases the efficacy of the monetary policy (changes the slope of both the dynamic and classic IS curves) and motivates the policy makers to choose a pro-cyclical monetary policy, which consequentially is manifested in the synchronization of the global financial cycle