In addition to international reserves, the configuration of the trilemma is enduring Tonglobal economic crisis.from Aizenman, Chinn and Ito (forthcoming open economy review2022).
Over the years, policymakers have explored various combinations of varying degrees of monetary policy independence, exchange rate stability, and financial openness, while recognizing that not all three policies can be maximized—the “currency trilemma” hypothesis. Holding International Reserves (IR) has become an important policy tool in recent years as a buffer or insurance against liquidity shortages. Major fundamental economic events, such as currency crises, often change the policy mix. In this paper, we find that countries’ policy mixes have diversified and changed over time from the perspective of the trilemma and international relations holdings. We then illustrate how the combination of the trilemma and IR holdings changed dramatically around the Asian Financial Crisis (AFC). However, the global financial crisis did not lead to dramatic changes in policy arrangements. We find that countries that faced large trade shocks or negative economic growth during the crisis increased their international relations holdings in the post-AFC. Countries that experienced negative growth during the crisis also tended to pursue greater exchange rate flexibility and more open financial markets. This feature applies to commodity exporters, but not to manufacturing exporters. Countries with larger current account deficits (ie “large capital borrowers”) tend to be more sensitive to economic growth during the AFC period. Countries receiving IMF stabilization programs or countries with sovereign wealth funds tend to hold more IR. These characteristics were not found after the global financial crisis. Overall, countries increased their international relations holdings after the global financial crisis, but did not respond to economic and institutional conditions during the crisis.
Two graphs show the broad range of some of our results. The first is a graph of the share of international reserves in world holdings grouped by region. The second shows the trilemma configuration in emerging Asia, before and after the global financial crisis.
figure 1: IR holdings by country group (% of world total). resource: Aizenman, Chinn, Ito (OER, 2022)Figure 3b.
In the late 1980s, the growth of developing Asian countries other than China was evident, and China’s share rose sharply after 2000. The global financial crisis actually marked the end of the rapid growth of China’s share (though not at the level of actual holdings).
Figure 2 shows the triple dilemma configuration (currency independence, exchange rate stability, financial openness, and international reserve holdings) in emerging Asia, as described in this paper postaland Aizenman, Chinn, and Ito ( [ACI2010] [ACI2011] [ACI2016] [ACI2017] [ACI2020]).
figure 2: The impact of the global financial crisis on the trilemma and investor relations allocation. resource: Aizenman, Chinn, Ito (OER, 2022)Figure 5b (excerpt).
After the global financial crisis (and before the pandemic), exchange rate stability declined slightly, while financial openness, monetary autonomy, and international reserves increased.
Of the various country groupings examined, this group may show the most dramatic changes from pre-GFC to post-GFC, with the exception of perhaps Eastern and Central Europe.
In this paper, we also examine the impact of the East Asian crisis of 1997, and the differential impact on exporters of commodities and manufactured goods.
