The 'Impossible Trinity' Hypothesis in an Era of Global Imbalances: Measurement and Testing

La Follette School of Public Affairs Working Paper Series No. 2012-007

28 Pages Posted: 2 Jun 2012

See all articles by Joshua Aizenman

Joshua Aizenman

National Bureau of Economic Research (NBER)

Menzie David Chinn

University of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics; 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: May 31, 2012

Abstract

We outline new metrics for measuring the trilemma aspects: exchange rate flexibility, monetary independence, and capital account openness, taking into account recent substantial international reserve accumulation. Since 1990, the trilemma variables in emerging markets have converged towards intermediate levels, characterizing by managed flexibility, using sizable international reserves as a buffer while retaining some degree of monetary autonomy. We test the linearity of the trilemma, and find that the weighted sum of the three trilemma variables adds up to a constant. Thus, a rise in one trilemma variable should be traded-off with a drop of the weighted sum of the other two.

Keywords: Impossible trinity, international reserves, financial liberalization, exchange rate regime

JEL Classification: F31, F36, F41, O24

Suggested Citation

Aizenman, Joshua and Chinn, Menzie David and Ito, Hiro, The 'Impossible Trinity' Hypothesis in an Era of Global Imbalances: Measurement and Testing (May 31, 2012). La Follette School of Public Affairs Working Paper Series No. 2012-007. Available at SSRN: https://ssrn.com/abstract=2071311 or http://dx.doi.org/10.2139/ssrn.2071311

Joshua Aizenman

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Menzie David Chinn (Contact Author)

University of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706-1393
United States
608-262-7397 (Phone)
608-262-2033 (Fax)

National Bureau of Economic Research (NBER)

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

Register to save articles to
your library

Register

Paper statistics

Downloads
279
rank
104,230
Abstract Views
1,269
PlumX Metrics