Trilemma Policy Convergence Patterns and Output Volatility

Joshua Aizenman and Hiro Ito

No 112012, Working Papers from Hong Kong Institute for Monetary Research

Abstract: We examine the development of open macroeconomic policy choices among developing economies from the perspective of the powerful "trilemma" hypothesis. We construct an index of divergence of the three trilemma policy choices, and evaluate its patterns in recent decades. We find that the three dimensions of the trilemma configurations are converging towards a "middle ground" among emerging market economies, equipped with managed exchange rate flexibility, underpinned by sizable holdings of international reserves, and intermediate levels of monetary independence and financial integration. We also find emerging market economies with more converged policy choices tend to experience smaller output volatility in the last two decades. Emerging markets with relatively low international reserves/GDP could experience higher levels of output volatility when they choose a policy combination with a greater degree of policy divergence while this heightened output volatility effect does not apply to economies with relatively high international reserves/GDP holding.

Keywords: Impossible Trinity; International Reserves; Financial Liberalization; Exchange Rate Regime (search for similar items in EconPapers)
JEL-codes: F31 F36 F41 O24 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2012-04
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (37)

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Related works:
Journal Article: Trilemma policy convergence patterns and output volatility (2012)
Working Paper: Trilemma Policy Convergence Patterns and Output Volatility (2012)
Working Paper: Trilemma Policy Convergence Patterns and Output Volatility (2012)
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