IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

The Impossible Trinity – from the Policy Trilemma to the Policy Quadrilemma

  • Aizenman, Joshua

The policy Trilemma (the ability to accomplish only two policy objectives out of financialintegration, exchange rate stability and monetary autonomy) remains a valid macroeconomicframework. The financial globalization during 1990s-2000s reduced the weighted average ofexchange rate stability and monetary autonomy. An unintended consequence of financialglobalization is the growing exposure of developing countries to capital flights, and deleveragingcrises. The significant costs associated with these crises added financial stability to the Trilemmapolicy goals, modifying the Trilemma framework into the policy Quadrilemma. Emergingmarkets frequently coupled their growing financial integration with sizable hoarding of reserves,as means of self-insuring their growing exposure to financial turbulences. The global financialcrisis of 2008-9 illustrated both the usefulness and the limitations of hoarding reserves as a selfinsurancemechanism. The massive deleveraging initiated by OECD countries in 2008 mayprovide the impetus for some emerging markets to impose “soft capital controls,†in the form ofregulations that restrain inflows of short terms funds. While modifying the global financialarchitecture to deal with the challenges of the 21th Centaury remains a work in progress, theextended Trilemma framework keeps providing useful insights about the trade-offs andchallenges facing policy makers, investors, and central banks.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:;origin=repeccitec
Download Restriction: no

Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt8cq7g4c9.

in new window

Date of creation: 28 Mar 2011
Date of revision:
Handle: RePEc:cdl:ucscec:qt8cq7g4c9
Contact details of provider: Postal: Santa Cruz, CA 95064
Phone: (831) 459-2743
Fax: (831) 459-5077
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Maurice Obstfeld & Kenneth Rogoff, 1995. "The mirage of fixed exchange rates," Working Papers in Applied Economic Theory 95-08, Federal Reserve Bank of San Francisco.
  2. Aizenman, Joshua & LEE, JAEWOO, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," Santa Cruz Center for International Economics, Working Paper Series qt44g3n2j8, Center for International Economics, UC Santa Cruz.
  3. Olivier Jeanne, 2007. "International Reserves in Emerging Market Countries: Too Much of a Good Thing?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 1-80.
  4. Joshua Aizenman & Nancy Marion, 2002. "The High Demand for International Reserves in the Far East: What's Going On?," NBER Working Papers 9266, National Bureau of Economic Research, Inc.
  5. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2004. "Monetary Sovereignty, Exchange Rates, and Capital Controls: The Trilemma in the Interwar Period," International Finance 0407008, EconWPA.
  6. Jeffrey A. Frankel & Sergio L. Schmukler & Luis Serven, 2002. "Global Transmission of Interest Rates: Monetary Independence and Currency Regime," NBER Working Papers 8828, National Bureau of Economic Research, Inc.
  7. 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, vol. 29(4), pages 615-641, June.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cdl:ucscec:qt8cq7g4c9. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lisa Schiff)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.