The Impossible Trinity (aka The Policy Trilemma)

Joshua Aizenman

Santa Cruz Department of Economics, Working Paper Series from Department of Economics, UC Santa Cruz

Abstract: The policy Trilemma (the ability to accomplish only two out of three policy objectives –financial integration, exchange rate stability and monetary autonomy) continues to be a validmacroeconomic framework. The financial globalization during 1990s-2000s reduced theweighted average of exchange rate stability and monetary autonomy. An unintendedconsequence of financial globalization has been the growing exposure of developing countries tocostly capital flights and deleveraging crises. Emerging Markets responded by adding financialstabilityto the three Trilemma policy goals, coupling their growing financial integration withlarge hoarding of international reserves, as means of self-insuring their growing exposure tofinancial-turbulences.

Keywords: Social and Behavioral Sciences; Capital Controls; Deleveraging; Exchange-rate flexibility; Exchange-rate regimes; Impossible Trinity; International Reserves; Policy Trilemma; Financial Crises; Monetary independence; Self-insurance; Financial Integration (search for similar items in EconPapers)
Date: 2010-05-15
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Citations: View citations in EconPapers (33)

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