The "ternary paradox" theory holds that the three goals of monetary policy independence, exchange rate stability and free capital flow cannot be achieved at the same time, but only two can be achieved at the same time. At present, the fixed exchange rate system and floating exchange rate system are still inconclusive.
The advantages of floating exchange rate system are: (1) floating exchange rate system can ensure the independence of monetary policy; (2) Floating exchange rate helps to alleviate external shocks; (3) There is less intervention, and the exchange rate will be determined by the market, which is more transparent; (4) There is no need to maintain huge foreign exchange reserves. However, people also have some concerns about floating exchange rate: (1) Under the floating exchange rate system, the exchange rate tends to fluctuate excessively, which may be unfavorable to trade and investment; (2) As the exchange rate fluctuates freely, people may speculate; (3) The floating exchange rate system puts forward higher requirements for a country's macroeconomic management ability and the development of financial markets. In fact, not every country can meet these requirements.
The advantages of fixed exchange rate system are: (1) the uncertainty of exchange rate fluctuation will be reduced; (2) Exchange rate can be regarded as a nominal currency, which promotes the stability of price level and inflation expectation. However, the fixed exchange rate system also has some shortcomings: (1) it is easy to overestimate the local currency, weaken the competitiveness of local export commodities, and cause unsustainable long-term current account imbalance; (2) At the same time, rigid exchange rate arrangements may be regarded as implicit exchange rate guarantees, thus encouraging short-term capital inflows and unsecured foreign loans, and damaging the health of the local financial system. Under the fixed exchange rate system, a country must either sacrifice the independence of its monetary policy or restrict the free flow of capital, otherwise it will easily lead to monetary and financial crises. For example, the European exchange rate mechanism crisis of 1992 ~ 1993, the Mexican peso crisis of 1994, the Asian financial crisis of 1997 and the Russian ruble crisis of 1998. These crisis countries adopted a fixed exchange rate system, and at the same time relaxed the control of capital projects to varying degrees.
To find a balance between the floating exchange rate system and the fixed exchange rate system, a better choice is the managed d F L o a T I ng exchange rate system. At present, China implements a managed floating exchange rate system. The implementation of this exchange rate system can rely on three tools, one is the monetary policy tool; Second, the central bank's hedging intervention in the foreign exchange market; The third is a certain degree of capital control. This system can not only maintain the independence of monetary policy, but also make the exchange rate flexible to cope with internal and external shocks. At the same time, the capital account can also be partially liberalized selectively to keep the capital flow controllable.