Trilemma Policy Convergence Patterns and Output Volatility

Joshua Aizenman and Hiro Ito

No 17806, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We examine the open macroeconomic policy choices of developing economies from the perspective of the economic "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 -- managed exchange rate flexibility underpinned by sizable holdings of international reserves, intermediate levels of monetary independence, and controlled financial integration. 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. Yet this heightened output volatility effect does not apply to economies with relatively high international reserves/GDP holding.

JEL-codes: F15 F2 F32 F36 F4 (search for similar items in EconPapers)
Date: 2012-02
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-opm
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Published as Aizenman, Joshua & Ito, Hiro, 2012. "Trilemma policy convergence patterns and output volatility," The North American Journal of Economics and Finance, Elsevier, vol. 23(3), pages 269-285.

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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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