BBL by Hiro Ito: The Optimal Policy Combinations Based on the Trilemma and the Predictability of Crisis
ADBI's Seminar Series brings eminent persons to ADBI to encourage debate among policymakers, researchers, academics, think tanks, and other audiences interested in economic development challenges in Asia, the Pacific, and Europe.
Professor Ito has conducted an empirical analysis on the impact of policy mismanagement on the probability of a financial crisis in the context of the "trilemma" hypothesis, which states that countries can achieve only two, not all at once, of the three open macro policy goals: monetary independence, exchange rate stability, and financial integration. This study will be an extension to the research projects Professor Ito has conducted with ADBI Dean Masahiro Kawai, in which they constructed a new set of indexes that measure the extent of achievement in each of the three policies. Based on their past studies that proved the statistical validity of the trilemma hypothesis, Professor Ito aims to examine if the deviations from an "optimal" policy combination based on the trilemma hypothesis can be a predictor of a financial crisis. First, Professor Ito will construct an empirical model that will allow him to come up with "optimal" combinations of the three trilemma policies. Second, by using the deviations of actual trilemma indexes from the predicted values as a measure of policy mismanagement, Professor Ito will examine if the deviations from the trilemma can help predict the probability of a crisis occurrence. This is based on a prior that when a country implements a policy combination inconsistent with the hypothesis, it would eventually have to experience a financial crisis.
Policymakers, academics, and the general public.