Measuring the Impossible Trinity: Lessons for Developing Countries

• Main Author: Ying, Zheng
• Format: Others
• Published: Scholarship @ Claremont 2018
• Subjects: The Impossible Trinity; Trilemma; International Finance; Developing Countries; International Economics; Macroeconomics
• Online Access: http://scholarship.claremont.edu/cmc_theses/1785; http://scholarship.claremont.edu/cgi/viewcontent.cgi?article=2832&context=cmc_theses

While the Impossible Trinity Theory (also known as the trilemma) has been widely recognized, due to its descriptive nature, very little has been done to test its validity empirically. This paper starts by comparing several recent constructions with regard to this matter and, after making some adjustments to the trilemma index invented by Aizenman et al. (2008), proves the validity of the Impossible Trinity Theory for developing countries. This paper then studies the empirical relationship between a country’s deviation from the average trilemma index and its economic performance. Empirical results find that while the overall deviation does not affect a country’s economic performance, individual deviations as well as regional factors are significant in determining unemployment and the real GDP growth rate.