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Trilemma and Financial Stability Configurations in Asia

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  • Joshua Aizenman

    (Asian Development Bank Institute (ADBI))

Abstract

This paper takes stock of recent research dealing with the degree to which the trilemma choices of Asian countries facilitated a smoother adjustment during the global crisis of 2008– 2009, and the way the region has been coping with the adjustment to the postcrisis challenges. We point out that emerging Asia has converged to a middle ground of the trilemma configuration : limited financial integration, a degree of monetary independence, and controlled exchange rate buffered by sizable international reserves. This configuration, with the proper management of balance sheet exposure and public finances, facilitated a smoother adjustment of emerging Asia to the crisis, and was instrumental in inducing the rapid resumption of growth. The swings of financial flows, from large deleveraging of foreign positions in 2008 to the renewed inflows in 2010, validate the insight of the public finance approach to financial integration : the gains from deeper financial integration should be balanced against the costs of growing exposure to turbulences. A key lesson of the crisis is the need to apply a comprehensive cost/benefit approach to prudential policies, to the regulation of external borrowing and of domestic financial intermediation, and to the accumulation and use of international reserves. We illustrate these results in the context of the challenges facing emerging Asia’s adjustment during the global financial crisis, and the postcrisis policy stance dealing with the renewed inflows of capital.

Suggested Citation

  • Joshua Aizenman, 2011. "Trilemma and Financial Stability Configurations in Asia," Macroeconomics Working Papers 23219, East Asian Bureau of Economic Research.
  • Handle: RePEc:eab:macroe:23219
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    References listed on IDEAS

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    1. Joshua Aizenman & Jaewoo Lee, 2005. "International reserves: precautionary versus mercantilist views, theory and evidence," Proceedings, Federal Reserve Bank of San Francisco.
    2. Aizenman, Joshua & Pinto, Brian & Radziwill, Artur, 2007. "Sources for financing domestic capital - Is foreign saving a viable option for developing countries?," Journal of International Money and Finance, Elsevier, pages 682-702.
    3. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2010. "Financial Stability, the Trilemma, and International Reserves," American Economic Journal: Macroeconomics, American Economic Association, pages 57-94.
    4. Guillermo A. Calvo, 1998. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics, Universidad del CEMA, vol. 1, pages 35-54, November.
    5. Joshua Aizenman & Reuven Glick, 2009. "Sterilization, Monetary Policy, and Global Financial Integration," Review of International Economics, Wiley Blackwell, vol. 17(4), pages 777-801, September.
    6. Dani Rodrik, 2006. "The social cost of foreign exchange reserves," International Economic Journal, Taylor & Francis Journals, pages 253-266.
    7. Joshua Aizenman & Jaewoo Lee, 2007. "International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence," Open Economies Review, Springer, pages 191-214.
    8. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2007. "Direct Investment, Rising Real Wages and the Absorption of Excess Labor in the Periphery," NBER Chapters,in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 103-132 National Bureau of Economic Research, Inc.
    9. Joshua Aizenman & Vladyslav Sushko, 2011. "Capital Flow Types, External Financing Needs, and Industrial Growth: 99 countries, 1991-2007," NBER Working Papers 17228, National Bureau of Economic Research, Inc.
    10. Yin-Wong Cheung & Xingwang Qian, 2007. "Hoarding of International Reserves: Mrs Machlup’s Wardrobe and the Joneses," CESifo Working Paper Series 2065, CESifo Group Munich.
    11. Michael P. Dooley & David Folkerts-Landau & Peter M. Garber, 2005. "An essay on the revived Bretton Woods system," Proceedings, Federal Reserve Bank of San Francisco.
    12. Aizenman, Joshua & Sun, Yi, 2012. "The financial crisis and sizable international reserves depletion: From ‘fear of floating’ to the ‘fear of losing international reserves’?," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 250-269.
    13. Andrew Crockett & Chairman, 1999. "General discussion : exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 411-422.
    14. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 329-368.
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    Cited by:

    1. Gan, Pei-Tha, 2014. "The precise form of financial integration: Empirical evidence for selected Asian countries," Economic Modelling, Elsevier, vol. 42(C), pages 208-219.

    More about this item

    Keywords

    Financial Stability; emerging Asia; financial integration; monetary independence; controlled exchange;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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