The illusion of monetary policy independence under flexible exchange rates

Abstract

The conventional 'trilemma' view is that countries that allow free capital flows can still pursue independent monetary policies as long as thy allow flexible exchange rates. This column examines the pass-through of Federal interest rates to policy cares in Chile, Colombia, and Mexico. The author concludes that, to the extent that central banks take into account other central banks' policies, there will be 'policy contagion' and that, even under flexible rates, monetary policy will not be fully ndependent.