Document Type
Working Paper
Publication Date
4-2014
Subjects
Central banks and banking, Monetary policy -- Asia, Globalization -- Economic aspects, Macroeconomics
Abstract
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 fifteen 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 macroeconomic policies that are less prone to crises. The degree of relative policy divergence is affected by past crisis experiences -- countries that experienced currency crisis or a currency-banking twin crisis tend to adopt a policy combination with a smaller degree of policy divergence.
Persistent Identifier
http://archives.pdx.edu/ds/psu/20348
Citation Details
Aizenman, Joshua and Ito, Hiro, "Living with the Trilemma Constraint: Relative Trilemma Policy Divergence, Crises, and Output Losses for Developing Countries" (2014). Economics Faculty Publications and Presentations. 65.
http://archives.pdx.edu/ds/psu/20348
Description
NBER Working Paper #19448.
A version of this paper was subsequently published in the Journal of International Money and Finance, 49 p. 28-51, (May 2014), available at https://doi.org/10.1016/j.jimonfin.2014.05.005.