Policy trilemma
The constraint that a country cannot have a fixed exchange rate, free capital movement and an independent monetary policy all at once. Any two are possible; choosing a regime means choosing which to give up.
Where you will meet it
Policy trilemma appears in 2 learning outcomes on the CFA syllabus. A few of them:
- Contrast the various currency regimes
“The trilemma explains the trade-off: free capital movement, a fixed rate and independent monetary policy cannot all be had at once.”
- Explain what governments aim to achieve by restricting capital flows
“The policy trilemma explains why: a country cannot have a fixed exchange rate, free capital movement and an independent monetary policy all at once, so restricting capital lets it keep the other two.”
See also
Practise it
Practise policy trilemma until it is automatic: questions that explain every wrong option.
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