Empirical Analysis of Trilemma in Emerging Economies

Abstract

Article History JEL Classification E58, F31The increasing debate on empirical evidences in testing the Mundell-Fleming theory has been the focus of this study. The study examines the effect of central banks" interventions on trilemma constraint using a panel dataset of 30 emerging market economies for the sample period 1980-2014. With the aid of the portfolio balance framework, the findings indicate that the weighted sum of the three trilemma objectives falls in the presence of foreign exchange market intervention. The capacity to loosen the constraints has decreased over time and has been most substantial in African emerging economies. Contribution/ Originality:This study contributes in the existing literature by testing the hypothesis of trilemma constraint in all emerging economies, using the most recent data. The paper contributes the first logical analysis of disaggregating the emerging markets. It documents that central banks do not have the capacity to loosen the trilemma trade-off.

Policy Trilemma and Interest Rate Behavior in Nigeria

“…Employing the portfolio balance model, Akinkunmi (2017) tested for the trilemma constraint in 30 emerging markets and also investigates the role of exchange rate intervention on the constraint. The result shows that the trilemma constraint is evident in these markets as a whole, and also in the African emerging market.…”