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Trilemma policy convergence patterns and output volatility

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  • Aizenman, Joshua
  • Ito, Hiro

Abstract

We examine the development of open macroeconomic policy choices among developing economies from the perspective of the powerful “trilemma” hypothesis. We construct an index of divergence of the three trilemma policy choices, and evaluate its patterns in recent decades. We find that the three dimensions of the trilemma configurations are converging toward a “middle ground” among emerging market economies, equipped with managed exchange rate flexibility, underpinned by sizable holdings of international reserves, and intermediate levels of monetary independence and financial integration. We also find emerging market economies with more converged policy choices tend to experience smaller output volatility in the last two decades. Emerging markets with relatively low international reserves/GDP could experience higher levels of output volatility when they choose a policy combination with a greater degree of policy divergence while this heightened output volatility effect does not apply to economies with relatively high international reserves/GDP holding.

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Bibliographic Info

Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

Volume (Year): 23 (2012)
Issue (Month): 3 ()
Pages: 269-285

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Handle: RePEc:eee:ecofin:v:23:y:2012:i:3:p:269-285

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Web page: http://www.elsevier.com/locate/inca/620163

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Keywords: Impossible trinity; International reserves; Financial liberalization; Exchange rate regime;

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References

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  4. Peter Blair Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Journal of Economic Literature, American Economic Association, vol. 45(4), pages 887-935, December.
  5. Cortuk, Orcan & Singh, Nirvikar, 2011. "Turkey’s trilemma trade-offs: is there a role for reserves?," MPRA Paper 33887, University Library of Munich, Germany.
  6. M. Ayhan Kose & Eswar Prasad & Kenneth S. Rogoff & Shang-Jin Wei, 2006. "Financial Globalization: A Reappraisal," NBER Working Papers 12484, National Bureau of Economic Research, Inc.
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  8. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2004. "The Trilemma in History: Tradeoffs among Exchange Rates, Monetary Policies, and Capital Mobility," NBER Working Papers 10396, National Bureau of Economic Research, Inc.
  9. Joshua Aizenman & Menzie D. Chinn & Hiro Ito, 2008. "Assessing the Emerging Global Financial Architecture: Measuring the Trilemma's Configurations over Time," NBER Working Papers 14533, National Bureau of Economic Research, Inc.
  10. Aizenman, Joshua & Chinn, Menzie D. & Ito, Hiro, 2011. "Surfing the waves of globalization: Asia and financial globalization in the context of the trilemma," Journal of the Japanese and International Economies, Elsevier, vol. 25(3), pages 290-320, September.
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  15. Torsten Sløk & Michael Klein & Luca Antonio Ricci & Hali J. Edison, 2002. "Capital Account Liberalization and Economic Performance: Survey and Synthesis," IMF Working Papers 02/120, International Monetary Fund.
  16. Joshua Aizenman & Jaewoo Lee, 2005. "International reserves: precautionary versus mercantilist views, theory and evidence," Proceedings, Federal Reserve Bank of San Francisco.
  17. Sebastian Edwards, 2001. "Capital Mobility and Economic Performance: Are Emerging Economies Different?," NBER Working Papers 8076, National Bureau of Economic Research, Inc.
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  22. M. Ayhan Kose & Kenneth Rogoff & Eswar Prasad & Shang-Jin Wei, 2003. "Effects of Financial Globalization on Developing Countries: Some Empirical Evidence," IMF Occasional Papers 220, International Monetary Fund.
  23. Cortuk, Orcan & Singh, Nirvikar, 2011. "Turkey's trilemma trade-offs," MPRA Paper 35623, University Library of Munich, Germany.
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  25. Helen Popper & Alex Mandilaras & Graham Bird, 2011. "Trilemma Stability and International Macroeconomic Archetypes in Developing Economies," School of Economics Discussion Papers 0311, School of Economics, University of Surrey.
  26. Aizenman, Joshua, 2011. "The Impossible Trinity – from the Policy Trilemma to the Policy Quadrilemma," Santa Cruz Department of Economics, Working Paper Series qt8cq7g4c9, Department of Economics, UC Santa Cruz.
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Citations

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Cited by:
  1. Jean Pierre Allegret, 2012. "Responses of Monetary Authorities in Emerging Economies to International Financial Crises: What Do We Really know?," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 3-32.
  2. Jamilov, Rustam, 2013. "Capital mobility in the Caucasus," Economic Systems, Elsevier, vol. 37(2), pages 155-170.
  3. Joshua Aizenman & Hiro Ito, 2013. "Living with the Trilemma Constraint: Relative Trilemma Policy Divergence, Crises, and Output Losses for Developing Countries," NBER Working Papers 19448, National Bureau of Economic Research, Inc.
  4. Bonatti, Luigi & Fracasso, Andrea, 2013. "Hoarding of international reserves in China: Mercantilism, domestic consumption and US monetary policy," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 1044-1078.
  5. Yu Hsing, 2012. "Impacts of the Trilemma Policies on Inflation, Growth and Volatility in Greece," International Journal of Economics and Financial Issues, Econjournals, vol. 2(3), pages 373-378.
  6. Jamilov, Rustam, 2012. "Capital mobility in the Caucasus," MPRA Paper 38184, University Library of Munich, Germany, revised Apr 2012.

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