Effects of the Trilemma Policies on Inflation, Growth and Volatility in Bulgaria.docVIP

Theoretical and Applied Economics Volume XIX (2012), No. 4(569), pp. 49-58 Effects of the Trilemma Policies on Inflation, Growth and Volatility in Bulgaria Yu HSING Southeastern Louisiana University, USA yhsing@ Abstract. This paper finds evidence of the trilemma for Bulgaria, suggesting that exchange rate stability, monetary independence and free capital mobility are binding and constrained. The policy combination of exchange rate stability and monetary independence has been prevalent. More exchange rate stability increases the growth rate of real GDP whereas more monetary independence or free capital mobility reduces the growth rate. The inflation rate, inflation volatility and output volatility are not affected by either one of the three trilemma policies. Keywords: impossible trinity; three trilemma policies; inflation; economic growth; volatility. JEL Codes: E44, E52, F31, F36. REL Codes: 8E, 8F, 8H.  50 Yu Hsing 1. Introduction Many countries would like to achieve exchange rate stability, monetary autonomy and financial openness in order to reduce exchange rate volatility, adjust interest rates or the money supply to stimulate a sluggish economy or cool down an over-heated economy, and attract foreign investments. The trilemma or impossible trinity of international economics suggests that only two of these three policies can be achieved at the same time (Ghosh, Gulde, Ostry, 1997, Edison, Klein, Ricci, Sl?k, 2002, Prasad, Rogoff, Wei, Kose, 2003, Levy-Yeyati, Sturzenegger, 2003, Eichengreen, Leblang, 2003, Frankel, Schmukler, Serven, 2004, Shambaugh, 2004, Obstfeld, Shambaugh, Taylor, 2005, 2009, 2010, Henry, 2006, Kose, Prasad, Rogoff, Wei, 2006, Prasad, Rajan, 2008, Aizenman, Chinn, Ito, 2008b, 2011a, Aizenman, Ito, 2012, and others). The US achieves monetary autonomy and free capital mobility and allows the