The impossible trinity postulates that it is impossible to
have a fixed exchange rate regime, an open capital account
and an independent monetary policy simultaneously. A
country can choose only two of these goals, but not all of
them simultaneously. If a country chooses a fixed exchange
rate and an open capital account, it means it has to forgo an
independent monetary policy. In other words, the cost of
maintaining a fixed exchange rate and an open capital
account is a loss of control over the domestic monetary policy,
as domestic interest rates will be correlated with the pegged
country rates. This hypothesis has been widely taught and
recognized since it is quite intuitive and helpful to understand
the constraints policy makers must face in an open economy
setting.