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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.

Suggested Citation

  • Aizenman, Joshua & Ito, Hiro, 2012. "Trilemma Policy Convergence Patterns and Output Volatility," Santa Cruz Department of Economics, Working Paper Series qt5vb313vr, Department of Economics, UC Santa Cruz.
  • Handle: RePEc:cdl:ucscec:qt5vb313vr
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    More about this item

    Keywords

    Social and Behavioral Sciences; Impossible trinity; international reserves; financial liberalization; exchange rate regime;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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