Impossible trinity Why can only any two be combined Why cant

Impossible trinity.

Why can only any two be combined? Why can\'t we have all three?

Solution

Impossible trinity has three dimensions, named as free capital flow, fixed exchange rate and sovereign monetary policy. Here, the achievement of two dimensions or objectives, make it impossible to achieve the third dimension or objective. It can be understood by the following explanation.
A free capital movement in the economy and sovereign monetary policy, will add volatility to the exchange rate and it will become flexible exchange rate in the economy. Here, the monetary policy, will not be able to manipulate the exchange rate. As a result, the fixed exchange rate cannot be achieved in this scenario.
When there is a fixed exchange rate and free capital flow, then it is important for the monetary policy to act and manipulate the demand and supply of currencies as well as work towards the pegging of the currencies. In this scenario, there will be no sovereign monetary policy while other two objectives are achieved.
It is the reason that, these three objectives are called as impossible trinity, as achieving the two objectives, make it impossible to achieve the third objective.