The inconsistent trinity of macroeconomic policy

Full freedom of cross-border capital movements
Fixed exchange rate
Independent monetary policy oriented toward domestic objectives

Obstfeld, Maurice & Taylor, Alan M. (1998). The Great Depression as a Watershed: International Capital Mobility over the Long Run. In: Bordo, Michael D./ Goldin, Claudia/ White, Eugene N. (Hrsgg.)(1998). The Defining Moment · The Great Depression and the American Economy in the Twentieth Century. Chicago: The University of Chicago Press. S.354f.

Secular movements in the scope for international lending and borrowing may be understood, we shall argue, in terms of a fundamental macroeconomic policy trilemma that all national policymakers face: the chosen macroeconomic policy regime can include at most two elements of the „inconsistent trinity“ of

(i) full freedom of cross-border capital movements,
(ii) a fixed exchange rate, and
(iii) an independent monetary policy oriented toward domestic objectives.

If capital movements are prohibited (element i is ruled out), a country on a fixed exchange rate can break ranks with foreign interest rates and thereby run an independent monetary policy. Similarly, a floating exchange rate (element ii is ruled out) reconciles freedom of international capital movements with monetary policy effectiveness (at least when some nominal domestic prices are sticky). But monetary policy is powerless to achieve domestic goals when the exchange rate is fixed and capital movements are free (element iii is ruled out), since intervention in support of the exchange parity then entails capital flows that exactly offset any monetary policy action threatening to alter domestic interest rates.