Working Paper: NBER ID: w17806
Authors: Joshua Aizenman; Hiro Ito
Abstract: 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.
Keywords: No keywords provided
JEL Codes: F15; F2; F32; F36; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| convergence of trilemma policy choices (E61) | lower output volatility (E39) |
| more converged policy choices (F68) | smaller output volatility (E39) |
| low international reserves to GDP ratios and greater policy divergence (F31) | higher output volatility (E39) |
| higher international reserves to GDP holdings (F31) | no heightened output volatility effect (E39) |
| policy divergence (F68) | output volatility (E23) |