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Abstract
The objective of this study is to test the trilemma and the quadrilemma monetary policy using Indonesia data with covering years 1983 – 2017. The research suggest that the monetary independence and capital account openness might have been more passionately pursued by Bank Indonesia for testing the trilemma; while testing of the quadrilemma, the concentration seems to have shifted to take a middle position within each policy objectives. In this study, the full sample period is split in three subsamples: 1983-2017, 1983 – 1999 and 2000 – 2017. The methodology used in this research is ordinary least square. Our findings show that the policy might have shifted from exchange rate stability, capital account openness and foreign reserves in the first subsample to other four policy objectives in the second subsample. It indicates that foreign reserve plays as fourth objective leading the central bank to achieve at the same time the three “impossible” goals. Therefore, taking into account foreign reserve as a monetary policy objective is deserved. Adequacy of reserves could higher our capacity to prevent or mitigate external shocks.
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References
- Aizenman, J. (2010). The Impossible Trinity (aka The Policy Trilemma). UC Santa Cruz: Department of Economics, UCSC. Retrieved from https://escholarship.org/uc/item/9k29n6qn.
- Aizenman, J. (2015). International Coordination and Precautionary Policies, International Economic Journal, 30(3), 379-391, DOI: 10.1080/10168737.2016.1211839.
- Aizenman, J., & Ito, H. (2012). Trilemma Policy Convergence Patterns and Output Volatility. North American Journal of Economics and Finance, 23(3), 269–285. https://doi.org/10.1016/j.najef.2012.03.002.
- Aizenman, J., & Marion, N. (2004). International Reserve Holdings with Sovereign Risk and Costly Tax Collection. The Economic Journal, 114(497), 569–591. https://doi.org/10.1111/j.1468-0297.2004.00232.x.
- Aizenman, J., Chinn, M. D., & Ito, H. (2008). Assessing the Emerging Global Financial Architecture: Measuring The Trilemma’s Configuration Over Time. NBER Working Paper Series, 14533, 1–58.
- Aizenman, J., Chinn, M. D., & Ito, H. (2013). The “Impossible Trinity” Hypothesis in an Era of Global Imbalances: Measurement and Testing. Review of International Economics, 21(3), 447–458. DOI https://doi.org/10.1111/roie.12047.
- Aizenman, J., Chinn, M. D., & Ito, H. (2016). Monetary policy spillovers and the trilemma in the new normal: Periphery country sensitivity to core country conditions. Journal of International Money and Finance. 68 (C) 298-330 https://doi.org/10.1016/j.jimonfin.2016.02.008.
- Aizenman, J., Lee, J. (2007). International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence. Open Economic Review 18, 191–214. https://doi.org/10.1007/s11079-007-9030-z.
- Hutchison, M., Sengupta, R., & Singh, N. (2012). India’s Trilemma: Financial Liberalization, Exchange Rates and Monetary Policy. The World Economy, 35(1), 3–18. https://doi.org/10.1111/j.1467-9701.2011.01381.x.
- Ito, Hiro; Kawai, Masahiro. (2014). Determinants of the Trilemma Policy Combination. Asian Development Bank Institute. http://hdl.handle.net/11540/1218. License: CC BY-NC-ND 3.0 IGO.
- Mansour, L. (2014). The Power of International Reserves : The Impossible Trinity Becomes Possible. GATE Working Papers WP 1420, Available at SSRN: https://ssrn.com/abstract=2477342 or http://dx.doi.org/10.2139/ssrn.2477342.
- Marlina, D., Andaiyani, S., & Hartawan, D. (2019). Dampak perbedaan suku bunga terhadap permintaan uang: Kasus Amerika Serikat dan Indonesia. Jurnal Ekonomi Pembangunan, 16(2), 56-62. DOI: https://doi.org/10.29259/jep.v16i2.8878.
- Mundell, R. (1963). Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates. The Canadian Journal of Economics and Political Science, 29(4), 475– 485. https://doi.org/10.2307/139336.
- Rajbinder, K.,Arup, C., Debdas R.(2019) Interrelationship between Capital Structure and Dividend Policy with Reference to Select Indian Companies. International Journal of Management, IT and Engineering, 8(9).361-384.
- Su, J., Cocker, L., Delana, D., & Sharma, P. (2015).Trilemma or Quadrilemma : the case of a PIC. Griffith University–South Pacific Central Banks Joint Policy Research Working Paper No. 2.
- Yunita, M., Achsani, N. A., & Anggraeni, L. (2017). Pengujian Trilemma Conditions pada Perekonomian Indonesia. Jurnal Ekonomi Dan Pembangunan Indonesia, 17(2), 151-168. https://doi.org/10.21002/jepi.v17i2.718.
References
Aizenman, J. (2010). The Impossible Trinity (aka The Policy Trilemma). UC Santa Cruz: Department of Economics, UCSC. Retrieved from https://escholarship.org/uc/item/9k29n6qn.
Aizenman, J. (2015). International Coordination and Precautionary Policies, International Economic Journal, 30(3), 379-391, DOI: 10.1080/10168737.2016.1211839.
Aizenman, J., & Ito, H. (2012). Trilemma Policy Convergence Patterns and Output Volatility. North American Journal of Economics and Finance, 23(3), 269–285. https://doi.org/10.1016/j.najef.2012.03.002.
Aizenman, J., & Marion, N. (2004). International Reserve Holdings with Sovereign Risk and Costly Tax Collection. The Economic Journal, 114(497), 569–591. https://doi.org/10.1111/j.1468-0297.2004.00232.x.
Aizenman, J., Chinn, M. D., & Ito, H. (2008). Assessing the Emerging Global Financial Architecture: Measuring The Trilemma’s Configuration Over Time. NBER Working Paper Series, 14533, 1–58.
Aizenman, J., Chinn, M. D., & Ito, H. (2013). The “Impossible Trinity” Hypothesis in an Era of Global Imbalances: Measurement and Testing. Review of International Economics, 21(3), 447–458. DOI https://doi.org/10.1111/roie.12047.
Aizenman, J., Chinn, M. D., & Ito, H. (2016). Monetary policy spillovers and the trilemma in the new normal: Periphery country sensitivity to core country conditions. Journal of International Money and Finance. 68 (C) 298-330 https://doi.org/10.1016/j.jimonfin.2016.02.008.
Aizenman, J., Lee, J. (2007). International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence. Open Economic Review 18, 191–214. https://doi.org/10.1007/s11079-007-9030-z.
Hutchison, M., Sengupta, R., & Singh, N. (2012). India’s Trilemma: Financial Liberalization, Exchange Rates and Monetary Policy. The World Economy, 35(1), 3–18. https://doi.org/10.1111/j.1467-9701.2011.01381.x.
Ito, Hiro; Kawai, Masahiro. (2014). Determinants of the Trilemma Policy Combination. Asian Development Bank Institute. http://hdl.handle.net/11540/1218. License: CC BY-NC-ND 3.0 IGO.
Mansour, L. (2014). The Power of International Reserves : The Impossible Trinity Becomes Possible. GATE Working Papers WP 1420, Available at SSRN: https://ssrn.com/abstract=2477342 or http://dx.doi.org/10.2139/ssrn.2477342.
Marlina, D., Andaiyani, S., & Hartawan, D. (2019). Dampak perbedaan suku bunga terhadap permintaan uang: Kasus Amerika Serikat dan Indonesia. Jurnal Ekonomi Pembangunan, 16(2), 56-62. DOI: https://doi.org/10.29259/jep.v16i2.8878.
Mundell, R. (1963). Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates. The Canadian Journal of Economics and Political Science, 29(4), 475– 485. https://doi.org/10.2307/139336.
Rajbinder, K.,Arup, C., Debdas R.(2019) Interrelationship between Capital Structure and Dividend Policy with Reference to Select Indian Companies. International Journal of Management, IT and Engineering, 8(9).361-384.
Su, J., Cocker, L., Delana, D., & Sharma, P. (2015).Trilemma or Quadrilemma : the case of a PIC. Griffith University–South Pacific Central Banks Joint Policy Research Working Paper No. 2.
Yunita, M., Achsani, N. A., & Anggraeni, L. (2017). Pengujian Trilemma Conditions pada Perekonomian Indonesia. Jurnal Ekonomi Dan Pembangunan Indonesia, 17(2), 151-168. https://doi.org/10.21002/jepi.v17i2.718.