Impossible Trinity Analysis : The Choice of Exchange Rate Regime Empirical Evidence from Multinomial Logit Model

DOI IR IR (HANDLE) Open Access

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The implication of trilemma policy is still controversial in recent macroeconomic nexus. The trilemma implies only two out of three objectives can be attainable hence the policymakers need to choose which one to abandon. This paper contributes to the literature by applying a multinomial logit model, where the exchange rate regime is the categorical dependent variable, with the combination of financial integration and monetary independence over 18 years for 171 countries. Also, I divide the sample into three income-groups, according to the World Bank classifications. Those groups are low-income, middle-income, and high-income economies. There are three main findings: (i) the impossible trinity holds at rounding the corner where a high degree of the financial integration and monetary independence coexist with the intermediate regime, (ii) at least, there is a quadratic relation between exchange rate regime and financial integration for the low-income economies, and (iii) the controlled variables--logarithm of real GDP, ratio of the average of exports plus imports to GDP, standard deviation of the terms of trade, inflation rate, share of mineral export to total export, total reserves in months of imports, dummy variable for ASEAN countries--incorporated in this paper, are significant in choosing an exchange rate regime with different impact magnitude.

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