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The Impossible Trinity (aka The Policy Trilemma)

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  • Aizenman, Joshua

Abstract

The policy Trilemma (the ability to accomplish only two out of three policy objectives –financial integration, exchange rate stability and monetary autonomy) continues to be a validmacroeconomic framework. The financial globalization during 1990s-2000s reduced theweighted average of exchange rate stability and monetary autonomy. An unintendedconsequence of financial globalization has been the growing exposure of developing countries tocostly capital flights and deleveraging crises. Emerging Markets responded by adding financialstabilityto the three Trilemma policy goals, coupling their growing financial integration withlarge hoarding of international reserves, as means of self-insuring their growing exposure tofinancial-turbulences.

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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 qt9k29n6qn.

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Date of creation: 15 May 2010
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Handle: RePEc:cdl:ucscec:qt9k29n6qn

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Keywords: Social and Behavioral Sciences; Capital Controls; Deleveraging; Exchange-rate flexibility; Exchange-rate regimes; Impossible Trinity; International Reserves; Policy Trilemma; Financial Crises; Monetary independence; Self-insurance; Financial Integration;

References

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  1. 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, Elsevier, vol. 29(4), pages 615-641, June.
  2. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers, National Bureau of Economic Research, Inc 7993, National Bureau of Economic Research, Inc.
  3. Maurice Obstfeld & Kenneth Rogoff, 1995. "The Mirage of Fixed Exchange Rates," NBER Working Papers, National Bureau of Economic Research, Inc 5191, National Bureau of Economic Research, Inc.
  4. 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, MIT Press, vol. 87(3), pages 423-438, August.
  5. 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, Elsevier, vol. 23(5), pages 701-733, September.
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Cited by:
  1. Sona Benecka & Lubos Komarek, 2014. "International Reserves: Facing Model Uncertainty," Working Papers, Czech National Bank, Research Department 2014/03, Czech National Bank, Research Department.

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