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Test of the Impossible Trinity Hypothesis for Five Selected Countries in the Asian and Pacific Regions

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  • Yu Hsing

    (Southeastern Louisiana University)

Abstract

This paper examines the functional form of the impossible trinity hypothesis for five selected countries in the Asian and Pacific regions including Australia, Japan, New Zealand, Singapore and South Korea. The linear, log-log and semi-log forms are compared. Based on the mean absolute percent error and Akaike information criterion, we find that the semi-log form on the dependent variable performs better than the other three forms. The goodness of fit is relatively high, suggesting that there is support for the impossible trinity hypothesis. These countries may adopt different policy combinations. Australia maintains a middle ground approach to all three goals. South Korea emphasizes monetary policy independence and financial market openness and allows the exchange rate of the won to fluctuate freely based on market forces.

Suggested Citation

  • Yu Hsing, 2012. "Test of the Impossible Trinity Hypothesis for Five Selected Countries in the Asian and Pacific Regions," Economics Bulletin, AccessEcon, vol. 32(1), pages 616-623.
    • Handle: RePEc:ebl:ecbull:eb-12-00096
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    References listed on IDEAS

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    1. Chinn, Menzie D. & Ito, Hiro, 2006. "What matters for financial development? Capital controls, institutions, and interactions," Journal of Development Economics, Elsevier, vol. 81(1), pages 163-192, October.
    2. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2005. "The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility," The Review of Economics and Statistics, MIT Press, vol. 87(3), pages 423-438, August.
    3. Frankel, Jeffrey & Schmukler, Sergio L. & Serven, Luis, 2004. "Global transmission of interest rates: monetary independence and currency regime," Journal of International Money and Finance, Elsevier, vol. 23(5), pages 701-733, September.
    4. Joshua Aizenman & Rajeswari Sengupta, 2013. "Financial Trilemma in China and a Comparative Analysis with India," Pacific Economic Review, Wiley Blackwell, vol. 18(2), pages 123-146, May.
    5. Joshua Aizenman & Jaewoo Lee, 2007. "International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence," Open Economies Review, Springer, vol. 18(2), pages 191-214, April.
    6. Aizenman, Joshua & Chinn, Menzie D. & Ito, Hiro, 2010. "The emerging global financial architecture: Tracing and evaluating new patterns of the trilemma configuration," Journal of International Money and Finance, Elsevier, vol. 29(4), pages 615-641, June.
    7. Aizenman, Joshua, 2010. "The Impossible Trinity (aka The Policy Trilemma)," Santa Cruz Department of Economics, Working Paper Series qt9k29n6qn, Department of Economics, UC Santa Cruz.
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    Cited by:

    1. Majumder Sayantan Bandhu & Nag Ranjanendra Narayan, 2017. "Policy Trilemma in India: Exchange Rate Stability, Independent Monetary Policy and Capital Account Openness," Global Economy Journal, De Gruyter, vol. 17(3), pages 1-13, September.

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    More about this item

    Keywords

    Impossible trinity; trilemma; exchange rate stability; monetary policy independence; financial market openness; functional form;
    All these keywords.

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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