The Trilemma Indexes

The Trilemma Indexes

University of California, Santa Cruz and NBER

University of Wisconsin, Madison and NBER

Portland State University

The "Trilemma" or the "Impossible Trinity"

In macroeconomic management, policy makers must face a trade-off of choosing two, not all, of the three policy choices: monetary independence, exchange rate stability, and financial openness. This is the famous hypothesis in international finance called the "trilemma" or the "impossible trinity."

History has shown that different international financial systems haven attempted to achieve combinations of two out of the three policy goals. For example, the Gold Standard system guaranteed capital mobility and exchange rate stability while the Bretton Woods system provided monetary autonomy and exchange rate stability.

The figure to the right intuitively shows that it is not at all possible to be simultaneously on all three sides of the triangle. For a comprehensive description of the hypothesis, refer to Aizenman (2010).

The "Trilemma Indexes"

We introduced the "trilemma indexes" in Aizenman, Chinn, and Ito (NBER Working Paper # 14533) to quantify the degree of achievement along the three dimensions of the "trilemma" hypothesis: monetary independence, exchange rate stability, and financial openness, for more than 170 countries. These indexes have since been updated. The monetary independence (MI) Index are now available for 171 countries from 1960 through 2010; the exchange rate stability (ERS) index for 180 countries from 1961 through 2010; and the financial openness index (KAOPEN; Chinn-Ito index, JDE 2006) 178 countries from 1970 through 2009. More complete information on the coverage of the countries can be found here.

The indexes are available in the Excel or STATA format.

The data description is available here.

A more complete dataset and more detailed data descriptions for KAOPEN can be found at the Chinn-Ito index website.

If you still have questions after reading the data description, please contact Hiro Ito (ito@pdx.edu).

Related Literature

Aizenman, Joshua (2010). "The Impossible Trinity (aka The Policy Trilemma)." forthcoming in the Encyclopedia of financial globalization.

Aizenman, Joshua and Hiro Ito (2012). "Trilemma Policy Convergence Patterns and Output Volatility," North American Journal of Economics and Finance, Volume 23, Issue 3, Pages 269–285 (December 2012).

Aizenman, Joshua and Hiro Ito (2012). "The Impossible Trinity, the International Monetary Framework and the Pacific Rim" Forthcoming in I. N. Kaur and N. Singh ed., Handbook of the Economics of the Pacific Rim (Oxford University Press).

Aizenman, Joshua, Menzie D. Chinn, and Hiro Ito (2012). "The 'Impossible Trinity' Hypothesis in an Era of Global Imbalances: Measurement and Testing," Forthcoming in the Review of International Economics.

Aizenman, Joshua, Menzie D. Chinn, and Hiro Ito (2012). The Financial Crisis, Rethinking of the Global Financial Architecture, and the Trilemma," In P. Morgan and M. Kawai, eds., Monetary and Currency Policy Issues for Asia: Implications of the Global Financial Crisis, Edward Elgar (February 2012). Also available as Asian Development Bank Institute Working Paper #213 (April).

Aizenman, Joshua, Menzie D. Chinn, and Hiro Ito (2011). "Trilemma Configurations in Asia in an Era of Financial Globalization", In China and Asia in the Global Economy, edited by Yin-Wong Cheung and Guonan Ma.

Aizenman, Joshua, Menzie D. Chinn, and Hiro Ito (2011). "Surfing the Waves of Globalization: Asia and Financial Globalization in the Context of the Trilemma," Journal of the Japanese and International Economies, vol. 25(3), p. 290 – 320 (September 2011).

Aizenman, Joshua, Menzie D. Chinn, and Hiro Ito (2010). "The Emerging Global Financial Architecture: Tracing and Evaluating the New Patterns of the Trilemma's Configurations", Journal of International Money and Finance, Vol. 29, No. 4, p. 615–641.

Aizenman, Joshua, Menzie D. Chinn, and Hiro Ito (2008). "Assessing the Emerging Global Financial Architecture: Measuring the Trilemma's Configurations over Time", NBER Working Paper Series, #14533 (December 2008, updated in April 2009).

February 20, 2013