Surfing the Waves of Globalization: Asia and Financial Globalization in the Context of the Trilemma
Joshua Aizenman,
Menzie Chen and
Hiro Ito
Santa Cruz Department of Economics, Working Paper Series from Department of Economics, UC Santa Cruz
Abstract:
Using the “trilemma indexes” developed by Aizenman et al. (2010) that measure the extent ofachievement in each of the three policy goals in the trilemma—monetary independence, exchange ratestability, and financial openness—we examine how policy configurations affect macroeconomicperformances, with focus on the Asian economies. We find that the three policy choices matter for outputvolatility and the medium-term level of inflation. Greater monetary independence is associated with loweroutput volatility while greater exchange rate stability implies greater output volatility, which can bemitigated if a country holds international reserves (IR) at a level higher than a threshold (about 20% ofGDP). Greater monetary autonomy is associated with a higher level of inflation while greater exchangerate stability and greater financial openness could lower the inflation rate. We find that trilemma policyconfigurations affect output volatility through the investment or trade channel depending on the opennessof the economies. Our results indicate that policy makers in a more open economy would prefer pursuinggreater exchange rate stability while holding a massive amount of IR. Asian emerging market economiesare found to be equipped with macroeconomic policy configurations that help the economies to dampenthe volatility of the real exchange rate. These economies’ sizeable amount of IR holding appears toenhance the stabilizing effect of the trilemma policy choices, and this may help explain the recentphenomenal buildup of IR in the region.
Keywords: Social and Behavioral Sciences; Impossible trinity; international reserves; financial liberalization; exchange rate; FDI flows (search for similar items in EconPapers)
Date: 2011-06-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (80)
Downloads: (external link)
https://www.escholarship.org/uc/item/3897k2ss.pdf;origin=repeccitec (application/pdf)
Related works:
Journal Article: Surfing the waves of globalization: Asia and financial globalization in the context of the trilemma (2011) 
Working Paper: Surfing the Waves of Globalization: Asia and Financial Globalization in the Context of the Trilemma (2010) 
Working Paper: Surfing the Waves of Globalization: Asia and Financial Globalization in the Context of the Trilemma (2009) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:cdl:ucscec:qt3897k2ss
Access Statistics for this paper
More papers in Santa Cruz Department of Economics, Working Paper Series from Department of Economics, UC Santa Cruz Contact information at EDIRC.
Bibliographic data for series maintained by Lisa Schiff ().