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“Impossible Trinity” Hypothesis: The causal Relation between Trilemma and Macro Policy Performance

Zhai, Weiyang (2021): “Impossible Trinity” Hypothesis: The causal Relation between Trilemma and Macro Policy Performance.

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Abstract

This paper investigates how trilemma policy and economic performance mutually affected each other in developing and emerging countries between 1990 and 2017. We find that higher capital openness lowers output volatility and the inflation rate. However, trilemma policy decisions are also affected by economic performance. Under a high inflation regime, a country is pressured to reduce its financial integration by restricting its capital openness. During periods of heightened global risk and financial crisis, a country is pressured to reduce its exchange rate stability.

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