Foreign-currency exposures on an economy's external balance sheet may jeopardize financial stability when the exchange rate depreciates. In fact, theory suggests that in such an environment it may be optimal for monetary policy in a floating regime to reduce exchange rate variation in order to...

We assess the empirical validity of the trilemma (or impossible trinity) in the 2000s for a large sample of advanced and emerging economies. To do so, we estimate Taylor-rule type monetary policy reaction functions, relating the local policy rate to real-time forecasts of domestic fundamentals,...