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Trilemma Policy Convergence Patterns and Output Volatility

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  • Aizenman, Joshua
  • Ito, Hiro

Abstract

We examine the open macroeconomic policy choices of developing economies from the perspectiveof the economic “trilemma†hypothesis. We construct an index of divergence of the threetrilemma policy choices, and evaluate its patterns in recent decades. We find that the threedimensions of the trilemma configurations are converging towards a “middle ground†amongemerging market economies -- managed exchange rate flexibility underpinned by sizable holdingsof international reserves, intermediate levels of monetary independence, and controlled financialintegration. Emerging market economies with more converged policy choices tend to experiencesmaller output volatility in the last two decades. Emerging markets with relatively low internationalreserves/GDP could experience higher levels of output volatility when they choose a policycombination with a greater degree of policy divergence. Yet this heightened output volatility effectdoes not apply to economies with relatively high international reserves/GDP holding.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt5vb313vr.

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Date of creation: 22 Jan 2012
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Handle: RePEc:cdl:ucscec:qt5vb313vr

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Keywords: Social and Behavioral Sciences; Impossible trinity; international reserves; financial liberalization; exchange rate regime;

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  7. Obstfeld, Maurice & Shambaugh, Jay C & Taylor, Alan M, 2008. "Financial Stability, the Trilemma, and International Reserves," CEPR Discussion Papers 6693, C.E.P.R. Discussion Papers.
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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. Jamilov, Rustam, 2012. "Capital mobility in the Caucasus," MPRA Paper 38184, University Library of Munich, Germany, revised Apr 2012.
  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. 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.

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