According to the monetary policy trilemma, countries cannot simultaneously achieve the three goals of exchange rate stability, monetary independence, and capital openness. In this study, we offer empirical evidence on the monetary and financial quadrilemma regarding the trade-off relationship between financial stability and the traditional trilemma variables. Further, we investigate whether macroprudential policy can mitigate this trade-off relationship of four objective variables. Using a data set from 116 countries for the period 2000–2013, we find that macroprudential policy has the potential to relax the traditional trilemma and quadrilemma constraints.
According to the monetary policy trilemma, countries cannot simultaneously achieve the three goals of exchange rate stability, monetary independence, and capital openness. In this study, we offer empirical evidence on the monetary and financial quadrilemma regarding the trade-off relationship between financial stability and the traditional trilemma variables. Further, we investigate whether macroprudential policy can mitigate this trade-off relationship of four objective variables. Using a data set from 116 countries for the period 2000–2013, we find that macroprudential policy has the potential to relax the traditional trilemma and quadrilemma constraints.
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