Excepting international reserves, trilemma configurations were durable through the global financial crisis. From Aizenman, Chinn and Ito (forthcoming Open Economies Review, 2022) (also NBER WP No. 30406).
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 achieved to the fullest extent – the “monetary trilemma” hypothesis. In recent years, holding international reserves (IR) has become an important policy instrument as a buffer or insurance against liquidity shortages. Significant and fundamental economic events such as currency crises have often changed the policy mix. In this paper, we find that countries’ policy mixes have been diverse and varied over time from the perspective of the trilemma and also IR holding. We then illustrate how the combination of the three trilemma policies and IR holding drastically changed before and after the Asian Financial Crisis (AFC). However, the Global Financial Crisis did not lead to a drastic change in the policy arrangements. We find that countries that faced large terms of trade shocks or negative economic growth during the crisis increase IR holding in the post-AFC. Countries that had negative growth during the crisis also tend to pursue more exchange rate flexibility and more open financial markets. This characteristic is true for commodity exporters, but not for manufacturing exporters. Countries with large current account deficit (i.e., “large capital borrowers”) tend to be more sensitive to economic growth at the time of the AFC. Countries that are under IMF stabilization programs or those with sovereign wealth funds tend to hold more IR. These characteristics were not found in the aftermath of the GFC. In general, countries increased their IR holdings after the GFC, but did not respond to the during-crisis economic and institutional conditions.
Two graphs show the broad sweep of our some of our results (many more are in the paper). First is a graph of the share of world holdings of international reserves, by regional grouping. The second shows trilemma configurations for Emerging Asia, pre- and post-Global Financial Crisis.
Figure 1: IR Holding by Country Groups (% of World Total). Source: Aizenman, Chinn, Ito (OER, 2022), Figure 3b.
The late 1980’s increase in Asian developing countries ex-China shows up clearly, with China’s share rising sharply post-2000. The Global Financial Crisis actually marks the end of rapid increase in China’s share (although not in actual level of holdings).
Figure 2 shows for Emerging Asia the trilemma configurations (monetary independence, exchange rate stability, and financial openness, along with international reserve holdings), as discussed in this post, and Aizenman, Chinn and Ito ( [ACI2010] [ACI2011] [ACI2016] [ACI2017] [ACI2020]).
Figure 2: Impacts of the Global Financial Crisis on the Trilemma and IR Configurations. Source: Aizenman, Chinn, Ito (OER, 2022), Figure 5b (excerpt).
Post-GFC (and pre-pandemic), exchange rate stability drops slightly, while financial openness, monetary autonomy and international reserves increase.
Among the various country groupings examined, this group shows perhaps the most marked changes going from pre-GFC to post-GFC, with perhaps the exception of Eastern and Central Europe.
In the paper, we also examine the implications of the East Asian Crisis of 1997, and the differential impact on commodity and manufactured goods exporters.