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The Impossible Trinity

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INTERNATIONAL FINANCE
“The impossible Trinity”
Has the “Managed Float” approach worked for Trinidad and Tobago?

The Impossible Trinity: Managed Float in Trinidad and Tobago

International economics holds the hypothesis that it’s impossible for a country to simultaneously execute: 1. A fixed exchange rate 2. Free capital movement and, 3. An independent monetary policy
This trilemma or “Impossible Trinity” as it is commonly referred to, is one of those aspects of the nature of things, like scarcity and asymmetric information that makes life difficult. Specifically, the trilemma means that a country can follow only two of the three aforementioned policies at once. To keep exchange rates fixed, the central bank must either restrict capital flows or give up its control over the domestic money supply, interest rates, and price level. This means that a country must make difficult decisions about which variables it wants to control and which it wants to give up to outside forces.
The four major international monetary regimes; specie standards, managed fixed exchange rate, free float and managed float differ, so to speak, in their solution to the trilemma. This paper focuses however, on the managed float as it relate to the Trinidad and Tobago economy.

The managed float exchange rate system

A managed float exchange rate system is an international financial arrangement, whereby central banks intervene only periodically, not necessarily to support a country's currency, but rather to stabilize volatile fluctuations in foreign exchange rates. A managed float is sometimes called a "dirty float" because exchange rates are free to fluctuate, but central banks are committed to intervene under conditions of perceived instability.3

Has the managed float approach worked in Trinidad and Tobago? Since the implementation of the managed float exchange

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