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Trilemma Policy Convergence Patterns and Output Volatility

  • Aizenman, Joshua
  • Ito, Hiro

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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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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  1. Aizenman, Joshua & Chen, Menzie & Ito, Hiro, 2011. "Surfing the Waves of Globalization: Asia and Financial Globalization in the Context of the Trilemma," Santa Cruz Department of Economics, Working Paper Series qt3897k2ss, Department of Economics, UC Santa Cruz.
  2. Joshua Aizenman & Jaewoo Lee, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," NBER Working Papers 11366, National Bureau of Economic Research, Inc.
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  9. Orcan ÇÖRTÜK & Nirvikar SINGH, 2013. "Turkey’ Trilemma Trade-offs: Is there a role for reserves?," Iktisat Isletme ve Finans, Bilgesel Yayincilik, vol. 28(328), pages 67-88.
  10. 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.
  11. 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.
  12. 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.
  13. Peter Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Discussion Papers 07-004, Stanford Institute for Economic Policy Research.
  14. 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.
  15. Popper, Helen & Mandilaras, Alex & Bird, Graham, 2013. "Trilemma stability and international macroeconomic archetypes," European Economic Review, Elsevier, vol. 64(C), pages 181-193.
  16. Francis E. Warnock & Hali J. Edison, 2001. "A Simple Measure of the Intensity of Capital Controls," IMF Working Papers 01/180, International Monetary Fund.
  17. 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.
  18. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2002. "External Wealth, the Trade Balance and the Real Exchange Rate," CEPR Discussion Papers 3153, C.E.P.R. Discussion Papers.
  19. Maurice Obstfeld & Jay C.Shambaugh & Alan M.Taylor, 2003. "The Trilemma in History:Tradeoffs among Exchange Rates, Monetary Policies,and Capital Mobility," DNB Staff Reports (discontinued) 94, Netherlands Central Bank.
  20. Guillermo A. Calvo, 1998. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 35-54, November.
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  22. Michael Hutchison & Rajeswari Sengupta & Nirvikar Singh, 2012. "India’s Trilemma: Financial Liberalisation, Exchange Rates and Monetary Policy," The World Economy, Wiley Blackwell, vol. 35(1), pages 3-18, 01.
  23. Cortuk, Orcan & Singh, Nirvikar, 2011. "Turkey's trilemma trade-offs," MPRA Paper 35623, University Library of Munich, Germany.
  24. Eduardo Levy-Yeyati & Federico Sturzenegger, 2003. "To Float or to Fix: Evidence on the Impact of Exchange Rate Regimes on Growth," American Economic Review, American Economic Association, vol. 93(4), pages 1173-1193, September.
  25. 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, vol. 23(5), pages 701-733, September.
  26. 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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  28. 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.
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