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Full-Text Articles in International Economics
Living With The Trilemma Constraint: Relative Trilemma Policy Divergence, Crises, And Output Losses For Developing Countries, Joshua Aizenman, Hiro Ito
Living With The Trilemma Constraint: Relative Trilemma Policy Divergence, Crises, And Output Losses For Developing Countries, Joshua Aizenman, Hiro Ito
Economics Faculty Publications and Presentations
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 …