The idea is derived from the academic works of Canadian economist Robert Mundell and British economist Marcus Fleming.
The Impossible Trinity, also known as the trilemma, is a fundamental concept in international economics and finance that highlights the inherent difficulty in achieving three policy goals simultaneously: a fixed foreign exchange rate, free capital movement, and an independent monetary policy. First, maintaining a fixed exchange rate implies a commitment to pegging a country's currency to another, limiting its ability to adjust to economic shocks. Second, allowing free capital movement enables cross-border capital flows, but it can lead to volatile exchange rates and loss of monetary control. Finally, pursuing an independent monetary policy grants flexibility but becomes challenging when attempting to stabilize the currency while allowing capital to move freely. The trilemma posits that a country can only achieve two out of these three objectives at any given time. Policymakers often grapple with this dilemma, adjusting their strategies based on economic priorities and global conditions to strike a delicate balance among the conflicting goals of exchange rate stability, capital mobility, and monetary autonomy. Understanding the Impossible Trinity is crucial for navigating the complexities of international financial systems and making informed policy decisions in an interconnected global economy.
