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    Unholy Trinity: Also Called The Impossible Trinity

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    Ali Khan
    The Unholy Trinity, also known as the Impossible Trinity, states that a government cannot simultaneously achieve fixed exchange rates, free capital movement, and an independent monetary policy. It can only choose two of the three options. For example, Singapore has free capital movement and fixed interest rates, requiring it to give up an independent monetary policy. Maintaining all three is impossible because if a government lowers interest rates during an economic downturn, capital will flow out of the country and depreciate its currency unless it raises rates or fixes its exchange rate.

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    Unholy Trinity: Also Called The Impossible Trinity

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    Ali Khan
    20 views2 pages
    The Unholy Trinity, also known as the Impossible Trinity, states that a government cannot simultaneously achieve fixed exchange rates, free capital movement, and an independent monetary policy. It can only choose two of the three options. For example, Singapore has free capital movement and fixed interest rates, requiring it to give up an independent monetary policy. Maintaining all three is impossible because if a government lowers interest rates during an economic downturn, capital will flow out of the country and depreciate its currency unless it raises rates or fixes its exchange rate.

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    The Unholy Trinity, also known as the Impossible Trinity, states that a government cannot simultaneously achieve fixed exchange rates, free capital movement, and an independent monetary policy. It can only choose two of the three options. For example, Singapore has free capital movement and fixed interest rates, requiring it to give up an independent monetary policy. Maintaining all three is impossible because if a government lowers interest rates during an economic downturn, capital will flow out of the country and depreciate its currency unless it raises rates or fixes its exchange rate.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    20 views2 pages

    Unholy Trinity: Also Called The Impossible Trinity

    Uploaded by

    Ali Khan
    The Unholy Trinity, also known as the Impossible Trinity, states that a government cannot simultaneously achieve fixed exchange rates, free capital movement, and an independent monetary policy. It can only choose two of the three options. For example, Singapore has free capital movement and fixed interest rates, requiring it to give up an independent monetary policy. Maintaining all three is impossible because if a government lowers interest rates during an economic downturn, capital will flow out of the country and depreciate its currency unless it raises rates or fixes its exchange rate.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    Unholy Trinity: also called the impossible trinity: the Impossible Trinity are three choices that a

    government cannot choose all at once. It can only pick two out of these three: fixed interest rates, free
    capital movements and the ability to set its own interest rate.

    For example, Singapore has chosen to have free capital movement and fixed interest rates. It must
    necessarily give up the ability to set its own interest rates, hence monetary policy.
    The state chooses free capital movement and the ability to set its own interest rate and hence its
    exchange rate must be free floating.

    The reason we cannot all three at once is because when a government is trying to lower interest rate to
    reviving the economy in recession. In order to do that, it must increase the supply of money in its
    economy. However, when the interest rate is lower than that of its trading partners (for example US), the
    investors will want to move their funds to that country, this will increase the supply of the country A in the
    forex market and depreciate its value. But if the government of country A wants to maintain a fixed
    exchange rate, then it will have buy back the excess currency and the demand for it, but it cannot do this
    for on continual basis as it will eventually run out of foreign reserves.

     Free capital flows


     Independent monetary policy ( setting interest rates)
     Fixed Exchange rate

    Q4. What is the underlying reason US issue TREASURIES?

     Since the U.S. government almost always spends more than it takes in, the
    national debt continues to rise. The U.S. debt surpassed $27 trillion. The
    government owes this to buyers of U.S. Treasury notes including individuals,
    companies, and foreign governments.  
    Demand will rise when there is an economic crisis. This is because investors
    consider U.S. Treasury’s to be an ultra-safe form of investment.
    To remain competitive, interest rates on other bonds and loans increase as
    Treasury yields rise
    Thus, the US government issues treasury stocks, bonds, notes, and inflation
    protected securities to makes up for the budget deficit.
     The yields on such treasury securities are used as benchmark i.e. risk free rate, and they are
    used in the pricing of other debt securities.
     The treasuries might reveal about the market participant expectation about the future path of
    country’s monetary and fiscal policy
     Also, market participants can use treasuries to hedge positions in other fixed income securities
    and to speculate on the course of interest and exchange rates because they can buy and sell
    treasuries quickly and with low transaction costs

    “General foreign buying of Treasuries reflects the global low interest


    environment,”

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