A key challenge for macroeconomic policy in open economies is how to simultaneously manage exchange rates, interest rates and capital account openness – the trilemma. This study calculates a trilemma index for India and investigates its evolution over time. We find that financial integration has increased markedly after the mid‐2000s, with corresponding limitations on monetary independence (MI) and exchange rate stability (ES). In addition, we empirically confirm that a rise in one trilemma variable is traded off with a drop in the weighted sum of the other two, i.e. the trilemma configuration is binding in India. Finally, we consider the implications of changes in the trilemma index for macroeconomic outcomes. We find that greater MI systemically contributes to lower inflation, so the twin goals of ES and capital account openness may create policy dilemmas in particular economic environments. ES is associated with less inflation volatility, suggesting that there may be secondary benefits channelled through import and commodity prices. In these relationships, however, changes in international reserves are not statistically significant, suggesting that foreign exchange market intervention has not mitigated the trilemma trade‐off in India.

No abstract

No abstract

A key challenge facing most emerging market economies today is how to simultaneously maintain monetary independence, exchange rate stability and financial integration subject to the constraints imposed by the Trilemma, in an era of widespread globalization. In this paper we overview and contrast the Trilemma policy choices and tradeoffs faced by the two key drivers of global economic growth-China and India. China's Trilemma configurations are unique relative to other emerging markets in the predominance of exchange rate stability, and in the failure of the Trilemma regression to capture a consistently significant role for financial integration. In contrast, the Trilemma configurations of India are in line with choices made by other emerging countries. India like other emerging economies has overtime converged towards a middle ground between the three policy objectives, and has achieved comparable levels of exchange rate stability and financial integration buffered by sizeable international reserves.

We analyze reallocations within the international bond portfolios of US investors. The most striking empirical observation is a steady increase in US investors' allocations toward emerging market local currency bonds, unabated by the global financial crisis and accelerating in the post-crisis period. Part of the increase in EME allocations is associated with global "push" factors such as low US long-term interest rates and unconventional monetary policy as well as subdued risk aversion/expected volatility. But also evident is investor differentiation among EMEs, with the largest reallocations going to those EMEs with strong macroeconomic fundamentals such as less volatile inflation and more positive current account balances.