The Trilemma: An Empirical Assessment over 35 years since the 1970s
This research provides further insight of trilemma phenomenon which is defined as the impossibility for a country to achieve at the same time the triple desirable goals of stability of its exchange rate, independence of its monetary policy and freedom of its capital flows. Using three indices measuring these three variables, we prove that the trilemma relationship exists provided some extra explanatory variables are added in the econometric fixed-effect model fs equation. Conditionality is therefore attached to the existence of the trilemma. Once these results are established we provide some additional analyses of the trilemma phenomenon. First, by introducing the concept of gperformance h we show that certain countries are coping better than others facing the trilemma constraint. Second, by using a triangle graph representing the trilemma goals at the vertices, we analyze the tradeoff that countries have adopted over years when dealing with this problem. We manage to show graphically that, rather than positioning themselves to the vertices of this triangle, countries usually adopt positions close to one side of it. These results can therefore be understood as the choice between three gdilemmas h represented by the triangle fs sides.
|Date of creation:||May 2009|
|Contact details of provider:|| Postal: 2-1 Naka, Kunitachi City, Tokyo 186|
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- Jay C. Shambaugh, 2004. "The Effect of Fixed Exchange Rates on Monetary Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 301-352. Full references (including those not matched with items on IDEAS)
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