The Impossible Trinity

836 Words Jun 15th, 2014 4 Pages
INTERNATIONAL FINANCE
“The impossible Trinity”
Has the “Managed Float” approach worked for Trinidad and Tobago?

The Impossible Trinity: Managed Float in Trinidad and Tobago

International economics holds the hypothesis that it’s impossible for a country to simultaneously execute: 1. A fixed exchange rate 2. Free capital movement and, 3. An independent monetary policy
This trilemma or “Impossible Trinity” as it is commonly referred to, is one of those aspects of the nature of things, like scarcity and asymmetric information that makes life difficult. Specifically, the trilemma means that a country can follow only two of the three aforementioned policies at once. To keep exchange rates fixed, the central bank must
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The strength of the country’s currency is reflected in the high foreign exchange reserve. Moreover, foreign currency accounts in local banks held by ordinary citizens and companies now total over US$3 billion. Does this however, mean success?

While a strong currency results in cheaper imported products and also lowers prices for domestic goods and services as many goods and services have parts and components that originate in foreign countries, the primary disadvantage of having a strong currency is, foreign consumers have had to pay higher prices to purchase goods and services from our country, which resulted in a decrease in the demand for our goods and services.

In a nutshell, the managed float system has helped in strengthening our currency however; this has benefited foreign economies and thus has negatively affected the domestic economy as it has increased demand for foreign goods and services; evident by our 4 billion dollar food import bill, without necessarily increasing demand for goods and services domestically. Therefore it has not helped in maximising the full potential of our economy.

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One possible solution though, is dollarization which means replacement of the local currency. This offers three major benefits (apart from the general advantage of reduced transactions costs). First, administrative expenses are reduced. No longer will the government incur the cost of maintaining an

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