- Impossible trinity
The Impossible Trinity (also known as the Inconsistent Trinity, Triangle of Impossibility or Unholy Trinity) is the hypothesis in
international economics that it is impossible to have all three of the following at the same time:
* Afixed exchange rate
* Free capital movement
* An independentmonetary policy .The formal model for this hypothesis is the
Mundell-Fleming model developed in the 1960s byRobert Mundell andMarcus Fleming . The idea of the impossible trinity went from theoretical curiosity to becoming the foundation ofopen economy macroeconomics in the 1980s, by which timecapital control s had broken down in many countries, and conflicts were visible betweenpegged exchange rate s and monetary policy autonomy. While one version of the impossible trinity is focused on the extreme case — with a perfectly fixed exchange rate and a perfectly opencapital account , a country has absolutely no autonomous monetary policy — the real world has thrown up repeated examples where the capital controls are loosened, resulting in greater exchange rate rigidity and less monetary-policy autonomy.In the modern world, given the growth of trade in
goods and services , capital controls are easily evaded. In addition, capital controls introduce numerous distortions. Hence, there is virtually no important country which has an effective system of capital control. Under these conditions, the Impossible Trinity asserts that a country has to choose between reducing currency volatility and running a stabilising monetary policy: it cannot do both.References
ee also
*
Liberal paradox
*Mundell-Fleming model
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