The policy trilemma, also known as the impossible or inconsistent trinity, says a country must choose between free capital mobility, exchange-rate management and monetary autonomy.
If the exchange rate is fixed but the country is open to cross-border capital flows, it cannot have an independent monetary policy.
To understand the trilemma, imagine a country that fixes its exchange rate against the US dollar and is also open to foreign capital.
If its central bank sets interest rates above those set by the Federal Reserve, foreign capital in search of higher returns would flood in.
If interest rates are kept below those in America, capital would leave the country and the currency would fall.
Where barriers to capital flow are undesirable or futile, the trilemma boils down to a choice: between a floating exchange rate and control of monetary policy; or a fixed exchange rate and monetary bondage.
The problem is when your country is the number one trading partner with over 100 other countries, there's a lot of capital holes to try and plug.
https://macroops.substack.com/p/the-mundell-fleming-trilemma
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