Premium Essay

Trilement

In: Social Issues

Submitted By mrkyo9x
Words 14567
Pages 59
Journal of International Money and Finance xxx (2014) 1e24

Contents lists available at ScienceDirect

Journal of International Money and Finance journal homepage: www.elsevier.com/locate/jimf

Living with the trilemma constraint: Relative trilemma policy divergence, crises, and output losses for developing countries
Joshua Aizenman a, 1, Hiro Ito b, * a b

University of Southern California and the NBER, University Park, Los Angeles, CA 90089-0043, USA
Department of Economics, Portland State University, 1721 SW Broadway, Portland, OR 97201, USA

a b s t r a c t
JEL classification:
F31
F36
F41
O24
Keywords:
Impossible trinity
International reserves
Financial liberalization
Financial crisis
Exchange rate regime

This paper investigates the potential impacts of the degree of divergence in open macroeconomic policies in the context of the trilemma hypothesis. Using an index that measures the relative policy divergence among the three trilemma policy choices, namely monetary independence, exchange rate stability, and financial openness, we find that emerging market countries have adopted trilemma policy combinations with the least degree of relative policy divergence in the last 15 years. We find that a developing or emerging market country with a higher degree of relative policy divergence is more likely to experience a currency or debt crisis.
However, a developing or emerging market country with a higher degree of relative policy divergence tends to experience smaller output losses when it experiences a currency or banking crisis. Latin
American crisis countries tended to reduce their financial integration in the aftermath of a crisis, while this is not the case for the Asian crisis countries. The Asian crisis countries tended to reduce the degree of relative policy divergence in the aftermath of the crisis, probably aiming at...

Similar Documents