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The Impossible Trinity and
Constraints on Policy options
Reserve Bank of India
First International Research
Conference
February 12-13 2010
Irma Rosenberg
Board Member of Swedish National Debt Office
The impossible trinity
Out of the 3 objectives
• Free capital mobility
• Exchange rate stability
• Monetary independence
policy makers can choose only 2
Emerging Market Countries:Exchange Rate
Regimes 1991, 1999 and 2006
56%
(22)
Per cent of total countries
60
50
41%
(16) 36%
(14)
40
46% 49%
(19)
(18)
36%
(14)
1991
30
20
10
1999
2006
15%
13% (6)
8% (5)
(3)
0
Hard peg
Intermediate
Note: Number of countries in parenthesis
Source: Fisher (2008), IMF
Float
The Trilemma Choices in Asia
Financial Exhange rate
openness*
regime
China
Hong Kong
India
1
0
1
Managed
Fixed
Managed float
Indonesia
Korea
Malaysia
1
1
1
Managed float
Float
Managed float
Phillipines
Singapore
1
0
Thailand
1
Managed float
Managed
(intermediate target)
Managed float
Note IMF Index 2005, 1= restrictions 0= no restrictions
Source: Hannoun (2007) and central bank webs
Monetary policy
regime
Stability of val. of currency
Currency board
Price stability and adequate
credit supply
Inflation target 2005
Inflation target 1998
Price stability/sustainable
growth
Inflation target 2002
Price stability
Inflation target 2000
Sweden Inflation expectations well anchored
Annual percentage change
5
5
CPI
Inflation expectations
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
94
96
98
00
02
04
06
08
10
Note. Refers to money market participants.
Sources: TNS Sifo Prospera and Statistics Sweden
12
14
Sweden Inflation has fallen remarkably
CPI, annual percentage change
18
18
CPI
Historical mean
Fixed exchange rate
16
14
16
14
Floating exchange rate
and inflation targetting
12
12
10
10
1993-2009
M ean 1,5
STD 1,4
8
8
6
6
4
4
1971-1992
M ean 8,3
STD 3,0
2
2
0
0
-2
-2
-4
-4
71
74
77
80
83
86
89
92
95
98
Sources: Statistics Sweden and the Riksbank
01
04
07
10
Sweden Growth is higher
GDP, annual percentage change
8
8
GDP
Historical mean
6
6
4
4
2
2
0
0
1995-2008
M ean 2,9
STD 1,4
1970-1994
M ean 1,9
STD 2,0
-2
-2
Floating exchange rate
and inflation targetting
Fixed exchange rate
-4
-4
70
74
78
82
86
Source: Statistics Sweden
90
94
98
02
06
10
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