Trilemma Policy Convergence Patterns and Output Volatility

HKIMR Working Paper No. 11/2012

29 Pages Posted: 19 Apr 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: April 18, 2012


We examine the development of open macroeconomic policy choices among developing economies from the perspective of the powerful “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, equipped with managed exchange rate flexibility, underpinned by sizable holdings of international reserves, and intermediate levels of monetary independence and financial integration. We also find 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 while this heightened output volatility effect does not apply to economies with relatively high international reserves/GDP holding.

Keywords: Impossible Trinity, International Reserves, Financial Liberalization, Exchange Rate Regime

JEL Classification: F31, F36, F41, O24

Suggested Citation

Aizenman, Joshua and Ito, Hiro, Trilemma Policy Convergence Patterns and Output Volatility (April 18, 2012). HKIMR Working Paper No. 11/2012. Available at SSRN: or

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)


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