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The Impossible Trinity and Capital Flows in East Asia

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  • Grenville, Stephen

    (Asian Development Bank Institute)

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    Abstract

    While the initial certainty and stark simplicity of the Impossible Trinity have fuzzed and softened over time, this idea still holds a powerful sway over analysis of exchange rates and in the policy debate on capital flows. Yet the practical evidence suggests that the constraints on policy implicit in this doctrine are greatly exaggerated. This disconnect between the analysis and the practical world seems a major limitation on developing suitable policies for addressing the very real problems which large volatile capital flows are causing emerging countries. The Impossible Trinity argument has been an unhelpful element in developing an effective policy framework to address these foreign capital inflows.

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    File URL: http://www.adbi.org/files/2011.11.07.wp319.impossible.trinity.capital.flows.east.asia.pdf
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    Bibliographic Info

    Paper provided by Asian Development Bank Institute in its series ADBI Working Papers with number 319.

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    Length: 23 pages
    Date of creation: 06 Nov 2011
    Date of revision:
    Handle: RePEc:ris:adbiwp:0319

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    Keywords: impossible trinity; exchange rates; capital flows; emerging economies;

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    1. Michele Cavallo, 2006. "Interest rates, carry trades, and exchange rate movements," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue nov17.
    2. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
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