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The “Impossible Trinity” Hypothesis in an Era of Global Imbalances: Measurement and Testing
Author(s) -
Aizenman Joshua,
Chinn Menzie David,
Ito Hiro
Publication year - 2013
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12047
Subject(s) - trilemma , economics , exchange rate flexibility , openness to experience , flexibility (engineering) , independence (probability theory) , monetary economics , econometrics , macroeconomics , monetary policy , international economics , exchange rate regime , statistics , mathematics , management , social psychology , psychology
We outline new metrics for measuring the trilemma aspects: exchange rate flexibility, monetary independence, and capital account openness, taking into account substantial international reserve accumulation that has taken place since the 2000s. Since 1990, the trilemma variables in emerging markets have converged towards intermediate levels, characterizing by managed flexibility, using sizable international reserves as a buffer while retaining some degree of monetary autonomy. We test the linearity of the trilemma, and find that the weighted sum of the three trilemma variables adds up to a constant. Thus, a rise in one trilemma variable should be traded‐off with a drop of the weighted sum of the other two.