Events at CERGE-EI

Prof. Helen Popper

Santa Clara University, Santa Clara, California, USA

Authors: Helen Popper, Alex Mandilaras, and Graham Bird

Abstract: 

This paper examines the stability of international macroeconomic policies. Using the simple geometry of the classic, open-economy trilemma, we introduce a new, univariate measure of international macroeconomic policy stability. We also characterize international macroeconomic arrangements in terms of their semblance to definitive policy archetypes; and, we use the trilemma constraint to provide a new gauge of monetary sovereignty.

Applying these measures to post-Bretton Woods data, we find that the least stable international macroeconomic policy combination is that of flexible exchange rates and open financial markets. We also find that most countries exhibit a greater degree of monetary sovereignty than has previously been indicated. Typically, countries blend a substantial degree of monetary sovereignty with both exchange rate stability and financial openness. (In this broadened sense, most countries are in the “middle” of the policy space.) Additionally, we find that large, official holdings of foreign reserves correspond to greater policy stability in low-income countries. However, no such increased stability is observed in middle income countries, which have the least stable policies, or in rich countries.

Full Text: “Trilemma Stability and International Macroeconomic Archetypes”