Central Bank operational frameworks can be challenged during times of severe financial stress. Typical of such an instance is where policymakers attempt to heavily manage or fix a domestic exchange rate whilst faced with balance of payments pressures. However, it is claimed to be impossible for policymakers to achieve both monetary independence and exchange rate stability if the domestic economy were to post a balance of payment surplus, otherwise known as the ‘impossible trinity’. The purpose of this paper is to investigate the European Monetary System crisis through the lens of Institutional Practice, that is the day‐to‐day operations of key institutions, such as the Central Bank, Treasury and commercial banks, with a view to demonstrate why global imbalances are able to occur and persist across the international monetary system. Through both a theoretical and an empirical appraisal, this paper shows how Central Banks in economies with a balance of payments surplus can circumvent the binding constraints of the trinity within their operational frameworks.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.