What if an economy tried to get as close to a perfect balance of all 3 parts of the Impossible Trinity as it could get? That is, what if an economy had the following features? - 1. Mostly free capital flows, where some limited capital controls are still present (such as a small tax on the inflow and/or outflow of capital for example). - 2. A non-fixed but resilient exchange rate, where the value of the economy's currency would remain mostly the same as a fixed fraction or multiple of the value of another commodity (such as the U.S. dollar, or the gold standard), but could also be allowed to deviate slowly over time (such as the value of a currency in relation to, say, the U.S. dollar possibly changing from a ratio of, say, 1:1 from one year to, say, 0.99:1 or 1.01:1 the next year). - 3. A mostly independent monetary policy, with banks being given some leeway to change interest rates, and with inflation being kept low.
Can you have a system with limited capital flow restrictions, independent monetary policy and a floating band exchange rate ....... I think India has such a system, its currency has never stopped depreciation though, the central bank steps in to slow down the rate of depreciation.
