Trilemma Policy Convergence Patterns and Output Volatility

25 Pages Posted: 3 Feb 2012

See all articles by Joshua Aizenman

Joshua Aizenman

National Bureau of Economic Research (NBER)

Hiro Ito

Portland State University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 2012

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.

Suggested Citation

Aizenman, Joshua and Ito, Hiro, Trilemma Policy Convergence Patterns and Output Volatility (February 2012). NBER Working Paper No. w17806. Available at SSRN: https://ssrn.com/abstract=1998604

Joshua Aizenman (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hiro Ito

Portland State University - Department of Economics ( email )

Portland, OR 97207-0751
United States
503-725-3930 (Phone)
503-725-3945 (Fax)

HOME PAGE: www.econ.pdx.edu

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