A central bank operating under a flexible exchange rate and an inflation-targeting regime has two primary long-term objectives: maintaining inflation at its target and ensuring a stable real exchange rate. Suppose this central bank decides to permanently set its policy interest rate at a level that is inconsistent with achieving both of these long-term goals simultaneously. Which of the following statements best describes the ultimate consequence of this policy choice?

Evaluating Long-Run Monetary Policy Consistency

A central bank operating with a flexible exchange rate and an inflation-targeting framework retains complete and unconditional autonomy over its domestic policy interest rate in the long run.

The Inherent Trade-Off in Long-Run Monetary Policy

Calculating the Long-Run Constrained Policy Rate