Some International Finance at ASSA

I’m not at the ASSA meetings in Atlanta this year, but my coauthor Hiro Ito is presenting our papers (with Joshua Aizenman) in two very interesting sessions on international finance.

Jan. 4, 8:00 am,

Global Financial Crisis, Regional Integration and Policy Responses in East Asia (F3)
Presiding: Yoonbai Kim (University of Kentucky)


  • Ceyhun Bora Durdu (Federal Reserve Board)
  • Woochan Kim (KDI School of Public Policy & Management)
  • Kwanho Shin (Korea University)
  • Cheol S. Eun (Georgia Tech)

Jan. 5, 10:15 am, AEA

Dealing with Exchange Rate Misalignments (F4), Presiding: Charles Engel (University of Wisconsin)


  • Mark Taylor (BlackRock Global Investors and Warwick University)
  • Roberto Chang (Rutgers University)
  • Giancarlo Corsetti (European University Institute)
  • Chris Erceg (Federal Reserve Board)

From the abstract to “Surfing…”:

Using the “trilemma indexes” developed by Aizenman et al. (2008) that measure the extent of achievement in each of the three policy goals in the trilemma, monetary independence, exchange rate stability, and financial openness, this paper examines how policy configurations affect macroeconomic performances with focus on the Asian economies. We find that the three policy choices do not matter for per capita economic growth. However, they do matter for output volatility and the medium-term level of inflation. Greater monetary independence is associated with lower output volatility while greater exchange rate stability implies greater output volatility, which can be mitigated if a country holds IR at a higher level than a threshold (around 20% of GDP). Greater monetary autonomy is associated with a higher level of inflation while greater exchange rate stability and greater financial openness could lower the inflation level. We find that trilemma policy configurations and external finances affect output volatility mainly through the investment channel. While a higher degree of exchange rate stability could
stabilize the real exchange rate movement, it could also make investment volatile, though the volatilityenhancing effect of exchange rate stability on investment can be cancelled by holding higher levels of international reserves (IR). Greater financial openness helps reduce real exchange rate volatility. These results indicate that policy makers in a more open economy would prefer pursuing greater exchange rate stability and greater financial openness while holding a massive amount of IR. Asian emerging market economies are found to be equipped with macroeconomic policy configurations that help the economies
to dampen the volatilities in both investment and real exchange rate. These economies’ sizeable amount of international reserves holding appears to help enhance the stabilizing effect of the trilemma policy choices, which explains the recent phenomenal buildup of international reserves in the region.

From the abstract to “Assessing…”:

We develop a methodology that allows us to characterize in an intuitive manner the choices countries have made with respect to the trilemma during the post Bretton-Woods period. The first part of the paper deals with positive aspects of the trilemma, outlining new metrics for measuring the degree of exchange rate flexibility, monetary independence, and capital account openness. The evolution of our “trilemma indexes” illustrates that after the early 1990s, industrialized countries accelerated financial openness, but reduced the extent of monetary independence while sharply increasing exchange rate stability. This process culminated at the end of the 1990s with the introduction of the euro. In contrast, the group of developing countries pursued exchange rate stability as their key priority up to 1990, although many countries moved toward greater exchange rate flexibility from the early 1970s onward.
Since 2000, measures of the three trilemma variables have converged towards intermediate levels characterizing managed flexibility, using sizable international reserves as a buffer, thus retaining some degree of monetary autonomy. Using these indexes, we also test the linearity of the three aspects of the trilemma: monetary independence, exchange rate stability, and financial openness. We confirm that the weighted sum of the three trilemma policy variables adds up to a constant, validating the notion that a rise in one trilemma variable should be traded-off with a drop of the weighted sum of the other
two. The second part of the paper deals with normative aspects of the trilemma, relating the policy choices to macroeconomic outcomes such as the volatility of output growth and inflation, and medium term inflation rates. Some key findings for developing countries include: (i) greater exchange rate stability implies greater output volatility, which can only be slightly mitigated by reserve accumulation;
(ii) somewhat counter to previous findings, greater exchange rate stability is also associated with greater inflation volatility, and (iii) greater monetary autonomy is associated with a higher level of inflation.
We believe these results differ from those identified in previous studies due to the comprehensive nature of our analysis, which encompasses more than 100 countries and 37 years, as well as the inclusion of a number of additional structural and policy variables in the regressions.

By the way, even the papers not online at the AEA website might be online elsewhere.

The University of Wisconsin-Madison is also represented in this panel.

Jan. 4, 2:30 pm, AEA

International Financial Markets (F4), Presiding: Kenneth West (University of Wisconsin)


  • Eric van Wincoop (University of Virginia)
  • Atish Ghosh (IMF)
  • Olivier Jeanne (Johns Hopkins)

Finally, I have to highlight this panel:

Jan. 3, 10:15 am, AEA

Remembering Arthur S. Goldberger (Panel Discussion),
Presiding: James Heckman (University of Chicago)

  • Lawrence Klein (University of Pennsylvania)
  • Glen Cain (University of Wisconsin)
  • Kate Antonovics (University of California-San Diego)
  • Gary Chamberlain (Harvard University)
  • Charles Manski (Northwestern University)
  • Harry Kelejian (University of Maryland)

This note summarizes the debt we applied econometricians owe Goldberger; Marginal Revolution and Stephen Malpezzi add their thoughts.

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3 thoughts on “Some International Finance at ASSA

  1. Steve Kopits

    OT: Would you or Jim care to deconstruct Bernanke’s recent talk on regulation vs. interest rates?

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