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Can all of the following three conditions: (1) fixed exchange rate, (2) free international flow of...

Can all of the following three conditions:

(1) fixed exchange rate,
(2) free international flow of capital, and
(3) independent monetary policy

Be satisfied simultaneously? Why?

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Answer #1

No, fixed exchange rate along with free international trade and independent monetary policy can never be coexisting because fixed interest rate has been done with the purpose of lowering down on the the flow of capital of the international trade because it is done with the purpose of curtailing down the transparency between the transactions and hence it can be said that it will be lowering the transparency in the foreign exchange market so there will not be independent monetary policy because there will always be government induced monetary policy, which will support the fixed exchange rate regime.

Hence, all these foreign exchange rate along with free international flow of capital and independent monetary policy cannot be satisfied simultaneously.

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