The Impossible Trinity and Its Impact on FDI Inflows in the Context of Economic Volatility

Abstract

The “impossible trinity” theorem states that a country cannot achieve all three goals simultaneously: independent monetary policy, exchange rate stability, and financial integration. The authors have examined the relationship between the impossible trinity and FDI inflows in a volatile economy to quantify the above three objectives. Based on previous studies, the authors use a trio of indicators to measure the degree of Monetary Independence (MI), Exchange Rate Stability (ER), and Financial Openness (FO). This study used the OLS linear regression model to test the existence of the impossible trinity in Vietnam over 2000–2022 and the Newey–West linear regression model to measure the degree of impossibility. Effects of policy combinations in the impossible trinity on foreign direct investment (FDI) have suffered many consequences from historical rare events, typically the Covid-19 pandemic. From there, the study confirms the existence of the impossible trinity in Vietnam from 2000 to 2022. We recommend selecting impossible triple policy combinations to attract FDI effectively, help the economy stabilize, and recover from the Covid-19 pandemic.