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New Measures of the Trilemma Hypothesis: Implications for Asia

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  • Ito, Hiro

    (Asian Development Bank Institute)

  • Kawai, Masahiro

    (Asian Development Bank Institute)

Abstract

The authors develop a new set of indexes of exchange rate stability, monetary policy independence, and financial market openness as the metrics for the trilemma hypothesis. In their exploration, they take a different and more nuanced approach than the previous indexes developed by Aizenman, Chinn, and Ito (2008). They show that the new indexes add up to the value two, supporting the trilemma hypothesis. They locate their sample economies’ policy mixes in the famous trilemma triangle—a useful and intuitive way to illustrate the state and evolution of policy mixes. They also examine if the persistent deviation of the sum of the three indexes from the value two indicates an unsustainable policy mix and therefore needs to be corrected by economic disruptions such as economic and financial crises.

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File URL: http://www.adbi.org/files/2012.09.21.wp381.new.measures.trilemma.hypothesis.asia.pdf
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Bibliographic Info

Paper provided by Asian Development Bank Institute in its series ADBI Working Papers with number 381.

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Length: 45 pages
Date of creation: 21 Sep 2012
Date of revision:
Handle: RePEc:ris:adbiwp:0381

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Keywords: trilemma hypothesis; trilemma triangle; exchange rate stability; monetary policy independence; financial market openness; asia;

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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. Kawai, Masahiro & Akiyama, Shigeru, 1998. "The Role of Nominal Anchor Currencies in Exchange Rate Arrangements," Journal of the Japanese and International Economies, Elsevier, vol. 12(4), pages 334-387, December.
  3. Maurice Obstfeld & Jay Shambaugh & Alan Taylor, 2004. "The Trilemma in History: Tradeoffs among Exchange Rates, Monetary Policies, and Capital Mobility," International Finance 0407003, EconWPA.
  4. Garcia, R. & Perron, P., 1994. "An Analysis of the Real Interest rate Under Regime Shifts," Cahiers de recherche 9428, Universite de Montreal, Departement de sciences economiques.
  5. Dennis Quinn & Martin Schindler & A Maria Toyoda, 2011. "Assessing Measures of Financial Openness and Integration," IMF Economic Review, Palgrave Macmillan, vol. 59(3), pages 488-522, August.
  6. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2001. "The external wealth of nations: measures of foreign assets and liabilities for industrial and developing countries," Journal of International Economics, Elsevier, vol. 55(2), pages 263-294, December.
  7. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  8. Philip R. Lane & Gian Maria Milesi-Ferretti, 2006. "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities,1970–2004," The Institute for International Integration Studies Discussion Paper Series iiisdp126, IIIS.
  9. John Huizinga & Frederic S. Mishkin, 1984. "Inflation and Real Interest Rates on Assets with Different Risk Characteristics," NBER Working Papers 1333, National Bureau of Economic Research, Inc.
  10. Eichengreen, Barry & Rose, Andrew & Wyplosz, Charles, 1996. " Contagious Currency Crises: First Tests," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 463-84, December.
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Cited by:
  1. Ito, Hiro & Kawai, Masahiro, 2014. "Determinants of the Trilemma Policy Combination," ADBI Working Papers 456, Asian Development Bank Institute.
  2. Hiro Ito & Masahiro Kawai, 2014. "Determinants of the Trilemma Policy Combination," Macroeconomics Working Papers 23967, East Asian Bureau of Economic Research.
  3. Kawai, Masahiro & Pontines, Victor, 2014. "The Renminbi and Exchange Rate Regimes in East Asia," ADBI Working Papers 484, Asian Development Bank Institute.

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