The final word on the Monetary Approach and the exchange rate impact from policy combinations concerns the idea from the Mundell–Fleming model that a central bank can in a world of high capital mobility target the exchange rate or the interest rate but not both. Another way of expressing this is that you can have two of the following but not all three:
A fixed exchange rate regime
Monetary policy independence
High capital mobility
The first assumes the targeting of the exchange rate, while the second assumes the targeting of inflation and interest rates. The discovery of this rule was the stuff of brilliance, the monetary equivalent of the discovery of penicillin, yet history is littered with examples of policymakers who ignored it to their cost. While the example of Asia and the subsequent Asian currency crisis may spring to mind, there are also examples within the developed world, notably that of the ERM crises of 1992–1993. Here, there was indeed a commitment to a type of fixed exchange rate regime under conditions of high capital mobility. At the same time however, ERM members were allowed monetary independence. In practice, some, notably the Benelux countries, appeared to all but abandon monetary independence in favour of adopting the harsh benchmark of Bundesbank monetary policy. Others, such as the UK, Italy and Spain, sought a greater degree of monetary independence. Is it any coincidence that these were either forced out of the ERM altogether or forced to devalue within it? While the argument is frequently made that the UK pound sterling went into the ERM at an overvalued level to the Deutschmark, a contrary argument could be made that sterling would have been forced out of the ERM no matter what its entry level because the UK authorities refused to relinquish monetary independence to the Bundesbank.

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