Impossible Trinity
The impossible trinity (trilemma) says a country cannot simultaneously have a fixed exchange rate, free capital mobility, and an independent monetary policy — it must drop one.
Definition
Under uncovered interest parity, i = i* + expected depreciation. A peg (expected dep = 0) plus open capital forces i = i*. Domestic rates then cannot target local inflation or output. Capital controls or a float restore a degree of freedom.
Why it matters
Every EM crisis debate is a trilemma debate. ‘Defend the peg and cut rates’ is a wish, not a policy.
Case
ERM 1992: the UK wanted low rates into recession and a DEM peg with open capital. The market picked the inconsistency. Hong Kong 1998 kept the peg and imported US rates.
How to read it
State which corner they chose and whether the ‘peg’ is hard or a dirty band. Soft pegs plus open capital are the usual blow-ups.
Key papers
Landmark references with real publisher or arXiv links — not token-overlap noise.
- Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange RatesMundell · 1963 · Canadian Journal of EconomicsMundell–Fleming backbone of the trilemma.