3 It also appears that the most important driving force behind the cycle is the monetary policy conducted in large countries, particularly the United States. Free capital movement makes it more difficult to isolate a country from the rest of the world – and indirectly thereby from monetary policy in large countries – even if it has a floating exchange rate. Some go so far as to say that developments on the financial markets have meant that the exchange rate is no longer a parameter for action in the trilemma. The trilemma has instead been reduced to a choice between only two alternatives – a dilemma: either one has free capital movement and accepts that it is then difficult or impossible to conduct a monetary policy of one’s own, or one conducts one's own monetary policy but counteracts the free movement of capital. 4 My main hypothesis: countries with floating exchange rates still have monetary policy autonomy However, this is probably going a bit too far as a general description of the actual situation in small open economies like Sweden. In a globalised world, developments abroad will always have great significance for what happens in your own country. Nevertheless, however, the situation seems to be that the choice of exchange rate regime plays an important part in how great the impact will be.
7 One implication of a relatively stronger exchange rate channel may be that, in the future, it may become even more important to small, open economies. This, in turn, may entail a number of complications, as exchange rate adjustments are sometimes associated with attempts to manipulate the value of a country’s own currency and “beggar-thy-neighbour” policies. However, as I have said, this is only a hypothesis so far, and more empirical evidence is needed regarding how globalisation has affected the monetary policy transmission mechanism. The debate on how much large central banks’ actions affect monetary policy in small countries will continue, as will the general discussion of the effects of globalisation on the possibilities for monetary policy. However, at present, it seems reasonable to assume that the low global interest rate poses a greater challenge when it comes to which monetary policy can be conducted in countries such as Sweden. 6  Caceres et al. (2016) define autonomy-restricting effects of foreign interest rates as the response in the domestic interest rate above and beyond what is justified by domestic economic circumstances. They find that, with this definition, the empirical analysis indicates significantly greater monetary policy autonomy in small, open economies than more traditional estimates suggest. See also Disyatat and Rungcharoenkitkul (2015). 7  See Meier (2013) and Georgiadis and Mehl (2015).