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Understanding the dynamics of the macroeconomic trilemma

Amr Hosny (), N Kishor () and Mohsen Bahmani-Oskooee ()

International Review of Applied Economics, 2015, vol. 29, issue 1, 32-64

Abstract: This paper tests the autonomy of domestic monetary policy in the context of the macroeconomic policy trilemma for a large data-set of developing and developed countries covering three different time periods characterized with different exchange rate regimes and capital controls. The existing literature uses fixed coefficient methodologies to examine monetary policy independence; whereas we show that the coefficients of interest are unstable as countries switch between different exchange rate regimes and/or capital controls over time. The contribution is in using a time-varying parameter model that better captures the effects of the heterogeneity in different exchange rate regimes and capital mobility restrictions on monetary policy independence over time, allowing a more accurate test of the macroeconomic trilemma.

Date: 2015
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