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Under the impossible trinity, it is alleged that attempts to maintain both monetary independence and an undervalued domestic exchange rate whilst being exposed to global capital flows will culminate in macroeconomic instability. To analyse the validity of the impossible trinity in the instance of a balance of payments surplus, we first employ a number of ARDL models to investigate the potential presence of co-integration between foreign reserves and several variables on the balance sheet of the Central Bank. A VECM is then used to exemplify the fact that policymakers must respond to an increase in foreign reserves so as to steer the interbank rate to the policy rate. In total, we argue that in the case of a balance of payment surplus (i) it is problematic to validate the existence of a transmission mechanism between foreign reserve accumulation and inflation; (ii) economies with heavily managed exchange rates appear to have achieved monetary independence whilst remaining open to global capital flows; and finally, (iii) since the four Central Banks examined target an overnight rate, rather than any form of monetary aggregate, 'exogenous' sterilisation initiatives are involuntary.

Abstract: Modern Monetary Theory advocates make the distinction between voluntary and involuntary constraints with respect to operation of key institutions, such as the Central Bank and Treasury, in their conduct of macroeconomic policy. In this article we explore several episodes of UK policymaking, in order to demonstrate consistency regarding the policy coordination between HM Treasury and the Bank of England, and, in addition, highlight numerous voluntary constraints which by their very nature can be finessed when circumstances demand. In particular, we show that the use of the Ways and Means account on a number of notable occasions has meant that Government spending was not constrained by prospective tax receipts and sales of Government securities. Also, the introduction of non-convertible banknotes and other strategies, including the financing of the First War Loan, meant that the prevailing voluntary constraints were sidestepped.

Many heterodox economists advocate the adoption of pluralist teaching strategies in universities, citing the benefits of developing the capacity of students to engage in critical thinking. However, with the dominance of orthodox macroeconomic thinking and increasing career pressures associated with the need to publish in leading mainstream journals, many teachers have become reliant on a limited number of orthodox macroeconomics textbooks. This paper explores how a small sample of leading introductory macroeconomics textbooks have responded to the challenges to orthodox macroeconomic thinking in the last decade or so since the Global Financial Crisis. We focus on the definitions of concepts and the consistency of the theoretical and policy frameworks, in the light of the insights about what we define as Institutional Practice. This concept refers to the way that the Central Bank, Treasury and commercial banks actually operate in modern monetary economies, as described by employees of international agencies such as the IMF and the European and national Central Banks. We also draw implications of our work for the teaching of undergraduate macroeconomics.

One of the most widely debated aspects of international macroeconomics surrounds the efficacy of Central Bank sterilisation. However, 'exogenous' sterilisation initiatives by the Central Bank are involuntary if policymakers are to achieve a policy rate objective. Also, in many instances any excess liquidity is able to be sterilised 'endogenously' by commercial banks. To demonstrate both forms of sterilisation, this paper employs several structural VAR models. We show that (a) both exogenous and endogenous sterilisation initiatives are more or less involuntary, (b) the impossible trinity can be challenged and (c) why imbalances across the international monetary system can occur and persist.