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Trilemma policy convergence patterns and output volatility

  • Aizenman, Joshua
  • Ito, Hiro

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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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
DOI: 10.1016/j.najef.2012.03.002
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