NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Trilemma Policy Convergence Patterns and Output Volatility

Joshua Aizenman, Hiro Ito

NBER Working Paper No. 17806
Issued in February 2012
NBER Program(s):   IFM   ITI

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.

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Document Object Identifier (DOI): 10.3386/w17806

Published: Aizenman, Joshua & Ito, Hiro, 2012. "Trilemma policy convergence patterns and output volatility," The North American Journal of Economics and Finance, Elsevier, vol. 23(3), pages 269-285. citation courtesy of

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