Trilemma

In macro-economics, "The Trilemma Problem" is one concerned with the incompatibility of currency mechanisms, capital controls and demand-side management.

An economy can only have two of the following.

1. Fixed Exchange Rates
   
   
2. Free Capital Mobility
   
   
3. Independent Monetary Policy

In systems where 1 and 2 exist, such as under the Gold Standard, a country must use its monetary policy to remain on the system, otherwise destabilising capital flows (hot money), will cause its fixed exchange rate to collapse.

In systems where 1 and 3 exist, such as in the Bretton Woods system, capital controls are used to allow countries to run their own independent monetary policy, keeping unemployment low, whilst at the same time having fixed exchange rates.

Most major economies in the world today have floating exchange rates, conditions 2 and 3. This allows for free movement of capital, which is good for growth, and independent monetary policies which can keep unemployment low. Unfortunately, it also means wild fluctuations in exchange rates which periodically wreak havoc in the manufacturing sectors of economies as a means of controlling inflation.

Tri*lem"ma (?), n. [NL., fr. Gr. (see Tri-) + any thing received, in logic, an assumption. Cf. Dilemma.]

1. Logic

A syllogism with three conditional propositions, the major premises of which are disjunctively affirmed in the minor. See Dilemma.

2.

A state of things in which it is difficult to determine which one of three courses to pursue.

 

© Webster 1913.