New Measures of the Trilemma Hypothesis: Implications for Asia
45 Pages Posted: 23 Sep 2012
Date Written: September 21, 2012
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: Suggested Citation