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Open Access Publications from the University of California

The Impossible Trinity (aka The Policy Trilemma)


The policy Trilemma (the ability to accomplish only two out of three policy objectives –financial integration, exchange rate stability and monetary autonomy) continues to be a validmacroeconomic framework. The financial globalization during 1990s-2000s reduced theweighted average of exchange rate stability and monetary autonomy. An unintendedconsequence of financial globalization has been the growing exposure of developing countries tocostly capital flights and deleveraging crises. Emerging Markets responded by adding financialstabilityto the three Trilemma policy goals, coupling their growing financial integration withlarge hoarding of international reserves, as means of self-insuring their growing exposure tofinancial-turbulences.

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