Trilemma Policy Convergence Patterns and Output Volatility

Joshua Aizenman and Hiro Ito

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

Abstract: We examine the open macroeconomic policy choices of developing economies from the perspectiveof the economic “trilemma” hypothesis. We construct an index of divergence of the threetrilemma policy choices, and evaluate its patterns in recent decades. We find that the threedimensions of the trilemma configurations are converging towards a “middle ground” amongemerging market economies -- managed exchange rate flexibility underpinned by sizable holdingsof international reserves, intermediate levels of monetary independence, and controlled financialintegration. Emerging market economies with more converged policy choices tend to experiencesmaller output volatility in the last two decades. Emerging markets with relatively low internationalreserves/GDP could experience higher levels of output volatility when they choose a policycombination with a greater degree of policy divergence. Yet this heightened output volatility effectdoes not apply to economies with relatively high international reserves/GDP holding.

Keywords: Social and Behavioral Sciences; Impossible trinity; international reserves; financial liberalization; exchange rate regime (search for similar items in EconPapers)
Date: 2012-01-22
New Economics Papers: this item is included in nep-mon
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Citations: View citations in EconPapers (38)

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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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