Test of the trilemma for five selected Asian countries and policy implications

Abstract

This article examines the trilemma for five Asian countries, including Indonesia, Malaysia, the Philippines, Singapore and Thailand, and focuses on the functional form of the trilemma equation and the selection of different policy combinations. The semi-log relationship on the dependent variable performs better than the linear and other relationships due to smaller values of the Mean Absolute Per cent Error (MAPE) and Akaike Information Criterion (AIC). There is support for the trilemma for Malaysia, the Philippines and Singapore and lack of evidence of the trilemma for Indonesia and Thailand. Different policy combinations prevail in Malaysia, the Philippines and Singapore. A country may switch to a different policy combination over time in order to deal with major economic events.

Keywords:

• trilemma
• impossible trinity
• exchange rate stability
• monetary policy independence
• free capital flows
• functional form

JEL Classification:

• E52
• F31
• F36
• F41

Notes