Trilemma Policy Convergence Patterns and Output Volatility

منو

" Trilemma Policy Convergence Patterns and Output Volatility "
Aizenman, Joshua; Ito, Hiro

Document Type	:	AL
Record Number	:	912750
Doc. No	:	LA5vb313vr
Title & Author	:	Trilemma Policy Convergence Patterns and Output Volatility [Article]\ Aizenman, Joshua; Ito, Hiro
Date	:	2012
Title of Periodical	:	UC Santa Cruz
Abstract	:	We examine the open macroeconomic policy choices of developing economies from the perspectiveof the economic “trilemma” hypothesis. We construct an index of divergence of the threetrilemma policy choices, and evaluate its patterns in recent decades. We find that the threedimensions of the trilemma configurations are converging towards a “middle ground” amongemerging market economies -- managed exchange rate flexibility underpinned by sizable holdingsof international reserves, intermediate levels of monetary independence, and controlled financialintegration. Emerging market economies with more converged policy choices tend to experiencesmaller output volatility in the last two decades. Emerging markets with relatively low internationalreserves/GDP could experience higher levels of output volatility when they choose a policycombination with a greater degree of policy divergence. Yet this heightened output volatility effectdoes not apply to economies with relatively high international reserves/GDP holding.