The emerging global financial architecture: Tracing and evaluating new patterns of the trilemma configuration

Joshua Aizenman; Menzie D. Chinn; Hiro Ito

doi:10.1016/j.jimonfin.2010.01.005

The emerging global financial architecture: Tracing and evaluating new patterns of the trilemma configuration

Joshua Aizenman, Menzie D. Chinn, Hiro Ito

Research output: Contribution to journal › Article › peer-review

181 Scopus citations

Abstract

This paper investigates how the trilemma policy mix affects economic performance in developing countries. We find that greater monetary independence can dampen output volatility, while greater exchange rate stability is associated with greater output volatility, which can be mitigated by reserve accumulation; greater monetary autonomy is associated with higher inflation, while greater exchange rate stability and greater financial openness is linked with lower inflation; pursuit of exchange rate stability can increase output volatility when financial development is at an intermediate stage. Greater financial openness, when accompanied by a high level of financial development, reduces output volatility.

Original language	English
Pages (from-to)	615-641
Number of pages	27
Journal	Journal of International Money and Finance
Volume	29
Issue number	4
DOIs	https://doi.org/10.1016/j.jimonfin.2010.01.005
State	Published - 1 Jun 2010
Externally published	Yes

Keywords

Exchange rate
FDI flows
Financial liberalization
Impossible trinity
International reserves

ASJC Scopus subject areas

Finance
Economics and Econometrics

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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10.1016/j.jimonfin.2010.01.005

Cite this

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title = "The emerging global financial architecture: Tracing and evaluating new patterns of the trilemma configuration",

abstract = "This paper investigates how the trilemma policy mix affects economic performance in developing countries. We find that greater monetary independence can dampen output volatility, while greater exchange rate stability is associated with greater output volatility, which can be mitigated by reserve accumulation; greater monetary autonomy is associated with higher inflation, while greater exchange rate stability and greater financial openness is linked with lower inflation; pursuit of exchange rate stability can increase output volatility when financial development is at an intermediate stage. Greater financial openness, when accompanied by a high level of financial development, reduces output volatility.",

keywords = "Exchange rate, FDI flows, Financial liberalization, Impossible trinity, International reserves",

author = "Joshua Aizenman and Chinn, {Menzie D.} and Hiro Ito",

note = "Funding Information: The financial support of faculty research funds of the UCSC and PSU is gratefully acknowledged. We would like to thank Eduardo Borensztein, Eduardo Cavallo, Camilo Tovar, Helen Popper, Reuven Glick, and the participants at the BIS-LACEA 2008 Rio meeting and the 3rd JIMF-SCCIE conference for their useful comments and suggestions.",

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T2 - Tracing and evaluating new patterns of the trilemma configuration

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AU - Chinn, Menzie D.

AU - Ito, Hiro

N1 - Funding Information: The financial support of faculty research funds of the UCSC and PSU is gratefully acknowledged. We would like to thank Eduardo Borensztein, Eduardo Cavallo, Camilo Tovar, Helen Popper, Reuven Glick, and the participants at the BIS-LACEA 2008 Rio meeting and the 3rd JIMF-SCCIE conference for their useful comments and suggestions.

PY - 2010/6/1

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N2 - This paper investigates how the trilemma policy mix affects economic performance in developing countries. We find that greater monetary independence can dampen output volatility, while greater exchange rate stability is associated with greater output volatility, which can be mitigated by reserve accumulation; greater monetary autonomy is associated with higher inflation, while greater exchange rate stability and greater financial openness is linked with lower inflation; pursuit of exchange rate stability can increase output volatility when financial development is at an intermediate stage. Greater financial openness, when accompanied by a high level of financial development, reduces output volatility.

AB - This paper investigates how the trilemma policy mix affects economic performance in developing countries. We find that greater monetary independence can dampen output volatility, while greater exchange rate stability is associated with greater output volatility, which can be mitigated by reserve accumulation; greater monetary autonomy is associated with higher inflation, while greater exchange rate stability and greater financial openness is linked with lower inflation; pursuit of exchange rate stability can increase output volatility when financial development is at an intermediate stage. Greater financial openness, when accompanied by a high level of financial development, reduces output volatility.

KW - Exchange rate

KW - FDI flows

KW - Financial liberalization

KW - Impossible trinity

KW - International reserves

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The emerging global financial architecture: Tracing and evaluating new patterns of the trilemma configuration

Abstract

Keywords

ASJC Scopus subject areas

UN SDGs

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