New Measures of the Trilemma Hypothesis: Implications for Asia

45 Pages Posted: 23 Sep 2012

See all articles by Hiro Ito

Hiro Ito

Portland State University - Department of Economics

Masahiro Kawai

Asian Development Bank Institute

Date Written: September 21, 2012

Abstract

The authors develop a new set of indexes of exchange rate stability, monetary policy independence, and financial market openness as the metrics for the trilemma hypothesis. In their exploration, they take a different and more nuanced approach than the previous indexes developed by Aizenman, Chinn, and Ito (2008). They show that the new indexes add up to the value two, supporting the trilemma hypothesis. They locate their sample economies’ policy mixes in the famous trilemma triangle — a useful and intuitive way to illustrate the state and evolution of policy mixes. They also examine if the persistent deviation of the sum of the three indexes from the value two indicates an unsustainable policy mix and therefore needs to be corrected by economic disruptions such as economic and financial crises.

Keywords: trilemma hypothesis, trilemma triangle, exchange rate stability, monetary policy independence, financial market openness, Asia

JEL Classification: F15, F 21, F31, F36, F41, O24

Suggested Citation

Ito, Hiro and Kawai, Masahiro, New Measures of the Trilemma Hypothesis: Implications for Asia (September 21, 2012). ADBI Working Paper 381. Available at SSRN: https://ssrn.com/abstract=2150072 or http://dx.doi.org/10.2139/ssrn.2150072

Hiro Ito (Contact Author)

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

Masahiro Kawai

Asian Development Bank Institute ( email )

Kasumigaseki Building 8F 3-2-5
Kasumigaseki Chiyoda-ku
Tokyo, 100-6008
Japan

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