Solving Macroeconomic Trilemma in Emerging Economies:Analysis using evolutionary economics simulations and policy implications

Abstract

Abstract

Solving Macroeconomic Trilemma in Emerging Economies: Analysis using evolutionary economics simulations and policy implications

Junhee Han Department of Economics The Graduate School Seoul National University

The macroeconomic trilemma states that economies are unable to have all three following policies: fixed exchange rate, free capital mobility and indepenent monetary policy. Thus, choosing the right policy choice has been an essential question for policy makers. To answer this question, this paper is going to find the optimal trilemma policy choice that provides highest economic growth rate for economies with different country specific characteristics: openness (export/GDP) and reserve (foreign reserve/GDP). In order to do so, the paper employs an agent based model in open economy to analyze the impact of each policy regime on macreconomics dynamics in simulation experiments. The paper is going to show two major findings: 1) for economies with low reserve ratio, the optimal policy choice is a regime with fixed exchange and capital control at any level of export ratio (regime 1). 2) for economies with medium or high reserve ratio, the optimal regime choice depends on the export ratio. The paper finds threshold export ratio that shifts optimal regime choice. If an economy has export ratio lower than the threshold value, the best regime choice is a regime with fixed exchange rate and capital control (regime 1) and vice versa. The paper also finds the optimal amount of capital control that yields highest economic growth rate in the economies that give up free capital mobility as a policy choice.