[MUSIC]
We just talked about how governments can intervene to influence the value of
a currency.
And we've discussed earlier different indicators that will influence the value
of a currency.
And you may have in your mind an emerging picture of
some of the contradictions that this leads us into.
And here I just would like to describe to you something that is often called in
economic literature, the impossible trinity.
The idea is that we have a little triangle, and you can see it
here on this slide, where we put at the top we've got free capital mobility.
Now this is part of globalization, we're not discussing it in this course.
But you know one of the things we've tried to achieve with our
globalized world is that capital can flow fairly freely around the world.
Which is an advantage to the countries that don't have much capital, right?
And it's advantage to the countries that do have capital.
So free capital mobility is an objective for many countries.
Then we've got, down here on the right hand side of this triangle,
we've got monetary policy autonomy.
Now you know from understanding economic policy making or
any macro course you might have taken.
That countries like to be able to use their interest rates
to influence their economy.
If they raise an interest rate, they're going to slow down an economy.
If they reduce the interest rate, they're going to stimulate the economy.
So they like to have the independence to do that.
We've got that down here.
And then on this part of the triangle, we've got exchange rate management.
What this refers to is that sometimes countries like to have
a certain currency value, as we've mentioned.
Sometimes they're happy with a weak currency or a strong currency for
whatever reason.
Because of the size of their foreign debt,
because of their need to export in order to grow.
So the triangle has these three components.
Free capital mobility, monetary autonomy, an exchange rate management.
The idea here is that you can't have all three at once, hence impossible trinity.
You can't get all three of those objectives at the same time.
You can pick two.
You pick two sides, two angles of the triangle, but you can't have all three.
So, just to give you an example.
Imagine that I'm a country that likes to maintain a certain exchange right, okay?
I like the Yen to be at a certain value, so I can export a lot if I'm in Japan.