"IMPOSSIBLE TRINITY IN A SMALL OPEN ECONOMY: A STATE–SPACE MODEL SIMULA" by Guna Raj Bhatta, Rabindra Nepal et al.
Should monetary policy independence be maintained when the exchange rate is fixed under closed capital account conditions in a small open economy? In this study, we simulate the impossible trinity condition during 1989 to 2019 on the Nepalese economy that restricts capital flows and fixes the exchange rate with India. We modify the traditional Taylor rule based on the monetary policy reaction function to characterize Nepal's economic conditions more closely. The state–space model simulation shows that the policy trilemma does not hold in Nepal, such that the model can predict interest r...
Source: uow.edu.au