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Title:Trilemma policy convergence patterns and output volatility PDF Logo
Authors:Aizenman, Joshua
Ito, Hiro
Issue Date:2012
Series/Report no.:Working Papers, UC Santa Cruz Economics Department 695
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.
Subjects:impossible trinity
international reserves
financial liberalization
exchange rate regime
JEL:F31
F36
F41
O24
Document Type:Working Paper
Appears in Collections:Working Papers, Economics Department, UC Santa Cruz

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