The Trilemma Indexes

The Trilemma Indexes

Joshua Aizenman

University of Southern California and NBER

Menzie Chinn

University of Wisconsin, Madison and NBER

Hiro Ito

Portland State University

Updated on 8/31/2021

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).

For a comprehensive overview of the trilemma theory as well as the works pertaining to it by Aizenman, Chinn, and Ito, refer to this paper by Joshua Aizenman (2018).

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 172 countries from 1960 through 2020; the exchange rate stability (ERS) index for 181 countries from 1961 through 2020; and the financial openness index (KAOPEN; Chinn-Ito index, JDE 2006) 181 countries from 1970 through 2019. 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.

The instructions and program files to recreate the indexes are available here.

For more details on the construction of the financial openness variable, KAOPEN, refer to the Chinn-Ito index website.

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

When you use the index, please acknowledge the following paper as the data source:

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 (2013). "The 'Impossible Trinity' Hypothesis in an Era of Global Imbalances: Measurement and Testing," Review of International Economics, 21(3), 447–458(August 2013).

Related Literature

Aizenman, Joshua (2017). "International Reserves, Exchange rates, and Monetary Policy – From the Trilemma to the Quadrilemma," prepared for the Oxford Research Encyclopedia of Economics and Finance.

Aizenman, Joshua, Menzie D. Chinn, and Hiro Ito (2016). "Balance Sheet Effects on Monetary and Financial Spillovers: The East Asian Crisis Plus 20" (with J. Aizenman and M. Chinn), NBER Working Paper #22737 (October 2016), forthcoming in the Journal of International Money and Finance.

Aizenman, Joshua, Menzie D. Chinn, and Hiro Ito (2016). "Monetary Policy Spillovers and the Trilemma in the New Normal: Periphery Country Sensitivity to Core Country Conditions," Journal of International Money and Finance, Volume 68, November 2016, Pages 298–330. Also available as NBER Working Paper #21128. Its summary is available at VOXEU.

Aizenman, Joshua and Hiro Ito (2014). "Living with the Trilemma Constraint: Relative Trilemma Policy Divergence, Crises, and Output Losses for Developing Countries", Journal of International Money and Finance 49 p.28-51.

Aizenman, Joshua and Hiro Ito (2013). "The Impossible Trinity, the International Monetary Framework and the Pacific Rim" In I. N. Kaur and N. Singh ed., Handbook of the Economics of the Pacific Rim (Oxford University Press).

Aizenman, Joshua and Hiro Ito (2013). "The More Divergent, the Better?: Lessons on Trilemma Policies, Crises, and Output Losses for Asia", Asian Development Review Volume 31, Number 2 (September 2014)

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

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).

August 31, 2021