Analysis of Exchange Rate Stability, Monetary Policy Independence and Financial Market Openness in Iranian Economy: Mundell- Fleming Approach

A key challenge for macroeconomic policy is how to simultaneously manage exchange rates, interest rates and capital account openness. The basic assumption is that there exists a tradeoff among monetary policy independence, exchange rate stability, and financial market openness and that changing one component is necessarily associated with a corresponding change in a combination of the other two components. The phenomenon of selecting three indexes including exchange rate stability, monetary policy independence, and financial market openness is known as Mundell-Fleming structure or impossible trinity or trilemma hypothesi .The aim of this research is to investigate trilemma hypothesis in the Iranian economy during the period 1974-2012. Using rolling regression and new criteria, three indexes were calculated. The results indicated that the sum of the indexes is not equal to 2 and in any year and therefore the Trilemma Hypothesis does not hold.