The Impossible Trinity in China

The Impossible Trinity, also known as the trilemma, is a policy-choice problem based on the Mundell–Flemming model (Mundell 1963; Flemming 1962), which states that it is impossible for a country to have control of all three of the following variables at the same time (Figure 1.1): a fixed exchange rate (i.e. control of the exchange rate); an open capital account (i.e. control of the capital account); and an independent monetary policy (i.e. control of the interest rate). It is both a hypothesis based on the uncovered interest rate parity condition 1 and an empirical finding showing that governments that have tried to simultaneously pursue all three goals have failed. Figure 1.1The Impossible Trinity Source: Author.