The Impossible Trinity in China

Chi Lo
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Chi Lo: Economic Strategist

Chapter 1 in China’s Impossible Trinity, 2015, pp 1-15 from Palgrave Macmillan

Abstract: Abstract 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 1.1 The Impossible Trinity Source: Author.

Keywords: Exchange Rate; Foreign Direct Invest; Capital Inflow; Capital Account; Exchange Rate Stability (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-137-53879-6_1

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DOI: 10.1057/9781137538796_1

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