Impossible trinity in a small open economy: A state-space model informed policy simulation

Bhatta, Guna Raj; Nepal, Rabindra; Jayanthakumaran, Kankesu; Harvie, Charles

doi:10.2139/ssrn.3882308

Cited by 3 publications

(9 citation statements)

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“…Studies by Aizenman et al (2008) and Shambaugh et al (2005) also concluded that the impossible trinity is valid. However, Bhatta et al (2021) in their study concluded that the impossible trinity is not valid in Nepal.…”

Section: Introductionmentioning

confidence: 94%

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Which Combination of Impossible Trinity Choices Ensures Output and Price Stabilities in India? A Sign‐Restricted Vector Autoregressive Analysis

Arora

Malik

Arora

2022

J of App Econs and Policy

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India has faced the impossible trinity challenge after it opened up its capital account post-1990s reforms. Accordingly, simultaneous achievement of three macroeconomic objectives, namely exchange Rate Stability, capital openness and monetary independence, is an impossible task and any combination of two objectives can be achieved by losing the third one. This attempt, therefore, validates the existence of impossible trinity in India and investigates its impact on the stability of both, economic growth and prices. The signrestricted vector autoregressive (VAR) methodology has been used to confirm the existence of impossible trinity and to identify the best trilemma policy combination for the Indian economy in order to achieve stable output growth with steady prices. A trinity combination of "capital openness" and "exchange rate stability" is found to be the best in achieving stability of macroeconomic indicators under evaluation. Furthermore, the absence of trinity in India is inferred to ensure macroeconomic stability. However, maintaining its absence for a substantial period is noticed to be a nearimpossible task.

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Section: Introductionmentioning

confidence: 94%

“…However, Bhatta et al . (2021) in their study concluded that the impossible trinity is not valid in Nepal.…”

Section: Introductionmentioning

confidence: 94%

Which Combination of Impossible Trinity Choices Ensures Output and Price Stabilities in India? A Sign‐Restricted Vector Autoregressive Analysis

Arora

Malik

Arora

2022

J of App Econs and Policy

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“…Aizenman (2019) and Patoria (2020) explained the Trilemma by the scarcity of instruments relative to policy objectives. Studying the validity of Trilemma has been given an increased attention in small open economies (Bhatta et al, 2021). Despite the multiplicity of empirical studies, both at one country level or at multi-country level, there was no consensus on the validity of Trilemma (Ihnatov and Căpraru, 2014).…”

Section: Introductionmentioning

confidence: 99%

“…Despite the multiplicity of empirical studies, both at one country level or at multi-country level, there was no consensus on the validity of Trilemma (Ihnatov and Căpraru, 2014). Some studies confirmed the validity of Trilemma such as Aizenman et al (2013); Bhatta et al (2021); Goh and McNown (2015); Hsing, 2012 a ; Kawai and Liu (2015); Majumder and Nag (2021) and You et al (2014). Others have failed to prove such Trilemma like Kim and Lee (2008) and Rey (2015).…”

Section: Introductionmentioning

confidence: 99%

“…Aizenman (2019) and Majumder and Nag (2021) confirmed the existence of such policy dilemma when introducing the quadrilemma that adds financial stability as a fourth policy objective to Trilemma. Bhatta et al (2021) argued that the target of solving such policy dilemma should be to reach the optimal mix of the Trilemma goals simultaneously which helps improving overall economic performance (henceforth macroeconomic performance). The latter can support achieving sound and sustainable economic development.…”

Section: Introductionmentioning

confidence: 99%

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“Impossible Trinity” effects on Macroeconomic performance in Non-oil Arab Economies: Evidence from Egypt, Jordan, Lebanon, Morocco, and Tunisia

Ezzat¹

2023

المجلة العلمیة للدراسات والبحوث المالیة والتجاریة

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Monetary policy autonomy, exchange rate stability and free capital mobility are critical macroeconomic goals for all countries. However, Mundel-Fleming's impossible trinity hypothesis states that the extreme cases for these three goals cannot be targeted simultaneously. Despite the multiplicity of literature focused on testing the validity of impossible trinity, few empirical studies focused on its impact on macroeconomic performance. Neither these empirical studies nor the theoretical framework agreed on the validity of impossible trinity or its impacts on macroeconomic performance, particularly in developing countries. This study tests mainly the impact of impossible trinity indices on macroeconomic performance. The study uses deductive approach applied on five Non-oil Arab Economies using panel macroeconomic data. Two models are estimated for the period 1977-2021 using system generalized method of moments. Results confirmed the dynamic nature of macroeconomic performance, the validity of impossible trinity in sample countries and the significance of impossible trinity on affecting macroeconomic performance. More specifically, output volatility and inflation rates decrease by having greater capital openness and greater exchange rates stability. Inflation rate only can be reduced by greater monetary autonomy. Supportive policies are proposed to effectively improve macroeconomic performance relying on impossible trinity.

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Testing for the uncovered interest parity condition in a small open economy: A state space modelling approach

Bhatta

Nepal²,

Harvie³

et al. 2022

Journal of Asian Economics

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Impossible trinity in a small open economy: A state-space model informed policy simulation

Cited by 3 publications

References 0 publications

Which Combination of Impossible Trinity Choices Ensures Output and Price Stabilities in India? A Sign‐Restricted Vector Autoregressive Analysis

Which Combination of Impossible Trinity Choices Ensures Output and Price Stabilities in India? A Sign‐Restricted Vector Autoregressive Analysis

“Impossible Trinity” effects on Macroeconomic performance in Non-oil Arab Economies: Evidence from Egypt, Jordan, Lebanon, Morocco, and Tunisia

Testing for the uncovered interest parity condition in a small open economy: A state space modelling approach

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