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‘Impossible Trinity’ Ends in China as PBOC Allows Freer Yuan

Bloomberg business news

(Bloomberg) –- The PBOC's push to devalue the yuan is being seen as a sign it's bowing to the so-called "Impossible Trinity." That's a theory that says a country cannot maintain an independent monetary policy, free capital borders and also a fixed exchange rate all at the same time. Bloomberg's Enda Curran reports on "Trending Business." (Source: Bloomberg)

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In giving markets a greater say in setting the yuan’s level, Zhou Xiaochuan is bowing to Nobel-prize winning economist Robert Mundell’s maxim that a country can’t maintain independent monetary policy, a fixed-exchange rate and free capital borders all at the same time.

The policy trilemma, or impossible trinity, is illustrated by Asia’s experience in the 1990s. When some countries violated the dictum, their pegged currencies, high interest rates and open capital borders attracted a flood of foreign investment that quickly reversed along with their trade balances, triggering the Asian financial crisis of 1997-98.