La trinidad imposible | Cap. 29 - Macroeconomía

Understanding the Impossible Trinity

Definition of Trilemma

• A trilemma represents a situation with three options where only two can be achieved simultaneously.

• The impossible trinity is a significant concept in macroeconomics, illustrating the limitations faced by monetary authorities.

Objectives of Monetary Authorities

• Monetary authorities aim to achieve three objectives: free capital mobility, fixed exchange rates, and autonomous monetary policy. However, only two can coexist at any given time.

Case Study: Germany's Economic Dilemma

• In Germany, with free capital mobility and a fixed exchange rate during a recession, lowering interest rates leads to capital outflow as investors seek better returns abroad.

• This outflow increases local currency supply, pressuring the exchange rate; thus, the Central Bank must intervene by reducing money supply—contradicting its goal of lowering interest rates.

Alternative Scenario: England's Approach

• England allows free capital mobility and maintains an autonomous monetary policy; if domestic interest rates are higher than abroad, it attracts foreign capital without needing to adjust for exchange rate fluctuations.

• This scenario illustrates that maintaining both a fixed exchange rate and an autonomous monetary policy while allowing free capital movement is unfeasible.

Example: China's Strategy