Effect of Impossible Trinity on Investment in Developing Countries: Evidence from Africa
Keywords:
Financial liberalization, impossible trinity, international reserves, FDI flows, exchange rate
Abstract
We are concerned about which choice among the trilemma index affects investment in developing countries. We use the empirical method to study Africa's trilemma index and investment. Using Ordinary Least Squares and Two Stages Least Squares estimators with a dataset covering 39 African countries over an extended period of 30 years, we indicate the effect of the trilemma index on investment in Africa is still a big challenge to control. The main reason is that most African countries do not have well-developed monetary policy and autonomy and rely on foreign direct investment (FDI). On the other hand, they do not have enough capacity to control exchange rate stability. The endogeneity tests support our findings.
References
1. Aizenman, J. (1987). Investment, Openness, and Country Risk. NBER working paper series. https://doi.org/10.3386/W2410
2. Aizenman, J. (2019). International Reserves, Exchange Rates, and Monetary Policy: From the Trilemma to the Quadrilemma. In Oxford Research Encyclopedia of Economics and Finance. https://doi.org/10.1093/acrefore/9780190625979.013.313
3. Aizenman, J., Chinn, M. D., & Ito, H. (2008). Assessing the Emerging Global Financial Architecture: Measuring the Trilemma’s Configurations over Time.
4. Aizenman, J., Chinn, M. D., & Ito, H. (2011). Surfing the waves of globalization: Asia and financial globalization in the context of the trilemma. Journal of the Japanese and International Economies, 25(3). https://doi.org/10.1016/j.jjie.2011.06.003
5. Aizenman, J., & Ito, H. (2014). The more divergent, the better? Lessons on trilemma policies and crises for Asia. Asian Development Review, 31(2). https://doi.org/10.1162/ADEV_a_00030
6. Annicchiarico, B., & di Dio, F. (2015). Environmental policy and macroeconomic dynamics in a new Keynesian model. Journal of Environmental Economics and Management, 69(1). https://doi.org/10.1016/j.jeem.2014.10.002
7. Aquilante, T., di Pace, F., & Masolo, R. M. (2022). Exchange-rate and news: Evidence from the COVID pandemic. Economics Letters, 213. https://doi.org/10.1016/j.econlet.2022.110390
8. Arefjevs, I., & Bogdanova, O. (2020). International Finance Trilemma as a Tool for Balanced Development of an Economy. European Integration Studies, 1(14). https://doi.org/10.5755/j01.eis.1.14.26318
9. Armstrong, C. S., Glaeser, S., & Kepler, J. D. (2019). Accounting quality and the transmission of monetary policy. Journal of Accounting and Economics, 68(2–3). https://doi.org/10.1016/j.jacceco.2019.101265
10. Atish, G. (2003). Exchange rate regimes: choices and consequences. Choice Reviews Online, 40(11). https://doi.org/10.5860/choice.40-6524
11. Bar-Eli, M., Krumer, A., & Morgulev, E. (2020). Ask not what economics can do for sports - Ask what sports can do for economics. In Journal of Behavioral and Experimental Economics (Vol. 89). https://doi.org/10.1016/j.socec.2020.101597
12. Baxter, M., & Stockman, A. C. (1989). Business cycles and the exchange-rate regime. Some international evidence. Journal of Monetary Economics, 23(3). https://doi.org/10.1016/0304-3932(89)90039-1
13. Boughton, J. M. (2003). On the origins of the Fleming-Mundell model. IMF Staff Papers, 50(1). https://doi.org/10.5089/9781451852998.001
14. Boutros, M., & Witmer, J. (2020). Monetary Policy Implementation in a Negative Rate Environment. Journal of Money, Credit and Banking, 52(2–3). https://doi.org/10.1111/jmcb.12605
15. Caglayan, M., & Demir, F. (2014). Firm Productivity, Exchange Rate Movements, Sources of Finance, and Export Orientation. World Development, 54. https://doi.org/10.1016/j.worlddev.2013.08.012
16. Calvert Jump, R., Hommes, C., & Levine, P. (2019). Learning, heterogeneity, and complexity in the New Keynesian model. Journal of Economic Behavior and Organization, 166. https://doi.org/10.1016/j.jebo.2019.07.014
17. Caruana, J., & Avdjiev, S. (2012). Sovereign creditworthiness and financial stability:an international perspective. Financial Stability Review, 16. https://doi.org/10.1016/j.jclepro.2018.07.330
18. Chinn, M. D., & Ito, H. (2006). What matters for financial development? Capital controls, institutions, and interactions. Journal of Development Economics, 81(1). https://doi.org/10.1016/j.jdeveco.2005.05.010
19. Clerc, P. (2021). The Dynamics of Unemployment and Inflation in New Keynesian Models with Two Labor Margins. Journal of Money, Credit and Banking, 53(2–3). https://doi.org/10.1111/jmcb.12768
20. Connor, J. W. (1973). The neo-classical transport theory of a plasma with multiple ion species. Plasma Physics, 15(8). https://doi.org/10.1088/0032-1028/15/8/003
21. da Silva, S. (2001). Chaotic exchange rate dynamics redux. Open Economies Review, 12(3). https://doi.org/10.1023/A:1011181423098
22. Deng, M., & Fang, M. (2022). Debt maturity heterogeneity and investment responses to monetary policy. European Economic Review, 144, 104095. https://doi.org/10.1016/J.EUROECOREV.2022.104095
23. Desai, V., & Potter, R. B. (2021). 5 New institutional economics and development. In The Companion to Development Studies. https://doi.org/10.4324/9780203773420-10
24. Dong, F., Miao, J., & Wang, P. (2020). Asset bubbles and monetary policy. Review of Economic Dynamics, 37. https://doi.org/10.1016/j.red.2020.06.003
25. Eisner, R., & Nadiri, M. I. (1968). Investment Behavior and Neo-Classical Theory. The Review of Economics and Statistics, 50(3). https://doi.org/10.2307/1937931
26. Fagiolo, G., Giachini, D., & Roventini, A. (2020). Innovation, finance, and economic growth: an agent-based approach. Journal of Economic Interaction and Coordination, 15(3). https://doi.org/10.1007/s11403-019-00258-1
27. Francis, B. B., Hunter, D. M., & Kelly, P. J. (2011). Financial Market Openness and Monetary Policy Independence: Does the Impact of Monetary Policy Differ between Investable and Non-Investable Firms? SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1362328
28. Hamiani, K. M., Buessings-Loercks, M., & Fleuriet, V. (2020). Monetary Policy Under an Exchange Rate Anchor. IMF Working Papers, 20(180). https://doi.org/10.5089/9781513556383.001
29. Husain, A. M., Mody, A., & Rogoff, K. S. (2005). Exchange rate regime durability and performance in developing versus advanced economies. Journal of Monetary Economics, 52(1). https://doi.org/10.1016/j.jmoneco.2004.07.001
30. Jebeniani, J., & Trabelsi, J. (2022). Effects of the business cycle on real exchange rate misalignments with respect to exchange rate regimes. International Economics, 170, 92–102. https://doi.org/10.1016/J.INTECO.2022.02.009
31. Jeffrey A. Frankel, & Saravelos, G. (2010). Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Crisis. In NBER Working Paper No. 16047.
32. Kashyap Heena. (2015). Relevance of classicaland neo-classical theories in present world. Indian Streams Research Journal, 5(1).
33. Keane, W. (2019). How everyday ethics becomes a moral economy, and vice versa. Economics, 13. https://doi.org/10.5018/economics-ejournal.ja.2019-46
34. Kiat, J. (2008). The effect of exchange rate and inflation on foreign direct investment and its relationship with economic growth in South Africa. Economics and Applied Informatics, 17(1).
35. Kiley, M. T. (2016). Policy paradoxes in the New Keynesian model. Review of Economic Dynamics, 21. https://doi.org/10.1016/j.red.2016.03.002
36. Kudryashov, N. A., & Zakharchenko, A. S. (2014). A note on solutions of the generalized Fisher equation. Applied Mathematics Letters, 32(1). https://doi.org/10.1016/j.aml.2014.02.009
37. Manova, K. (2008). Credit constraints, equity market liberalizations and international trade. Journal of International Economics, 76(1). https://doi.org/10.1016/j.jinteco.2008.03.008
38. Megasari, T., & Saleh, S. (2021). Determinant of FDI Inflows in OIC Countries. International Journal of Islamic Economics and Finance (IJIEF), 4(1). https://doi.org/10.18196/ijief.v4i1.9473
39. Mishkin, F. S. (2009). Globalization, macroeconomic performance, and monetary policy. Journal of Money, Credit and Banking, 41(SUPPL. 1). https://doi.org/10.1111/j.1538-4616.2008.00204.x
40. Mundell, R. A. (1963). Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates. In Science politique (Vol. 29, Issue 4).
41. North, D. (1993). The New Institutional Economics and Development. EconWPA Economic History, January.
42. Obstfeld, M., Shambaugh, J. C., & Taylor, A. M. (2004). Monetary sovereignty, exchange rates, and capital controls: The Trilemma in the interwar period. IMF Staff Papers, 51(SPEC. ISS.).
43. Obstfeld, M., Shambaugh, J. C., & Taylor, A. M. (2008). Financial Stability, the Trilemma, and International Reserves Maurice. NBER Working Paper, 14217(April).
44. Obstfeld, M., Shambaugh, J. C., & Taylor, A. M. (2009). Financial instability, reserves, and central bank swap lines in the panic of 2008. American Economic Review, 99(2). https://doi.org/10.1257/aer.99.2.480
45. Obstfeld, M., Shambaugh, J. C., & Taylor, A. M. (2010). Financial stability, the trilemma, and international reserves. American Economic Journal: Macroeconomics, 2(2). https://doi.org/10.1257/mac.2.2.57
46. Ojapinwa, T. v., & Nwokoma, N. I. (2018). Workers’ Remittances and the Dutch-Disease Argument: Investigating the Relationship in Sub-Saharan Africa. African Development Review, 30(3). https://doi.org/10.1111/1467-8268.12339
47. Omankhanlen, A. E. (2011). The Effect of Exchange Rate and Inflation on Foreign Direct Investment and Its Relationship with Economic Growth in Nigeria. Economics and Applied Informatics, 17(1).
48. Razin, A., Rubinstein, Y., & Berglas, E. (2004). NBER working paper series growth effects of the exchange-rate regime and the capital-account openness in a crisis-prone world market: a nuanced view Growth Effects of the Exchange-Rate Regime and the Capital-Account Openness in A Crisis-Prone World Market: A Nuanced View. http://www.nber.org/papers/w10555
49. Tran, H. H., Le, T. P. T. D., Nguyen, V. T. H., Le, D. T. A., & Trinh, N. H. (2021). The Impact of Financial Integration on Monetary Policy Independence: The Case of Vietnam. Journal of Asian Finance, Economics and Business, 8(2). https://doi.org/10.13106/jafeb.2021.vol8.no2.0791
50. Waldén, L. J., Meade, J. E., & Walden, L. J. (1961). A Neo-Classical Theory of Economic Growth. Ekonomisk Tidskrift, 63(3). https://doi.org/10.2307/3438723
51. Woodford, M. (2013). Globalization and Monetary Control. In International Dimensions of Monetary Policy. https://doi.org/10.7208/chicago/9780226278872.003.0002
52. Yokus, A., & Yavuz, M. (2021). Novel comparison of numerical and analytical methods for fractional burger⇓fisher equation. Discrete and Continuous Dynamical Systems - Series S, 14(7). https://doi.org/10.3934/DCDSS.2020258
53. Yu, Y., & Qayyum, | Muhammad. (2021). Impacts of financial openness on economic complexity: Cross-country evidence. https://doi.org/10.1002/ijfe.2491
54. Zhang, T. (2022). Monetary Policy Spillovers through Invoicing Currencies. Journal of Finance, 77(1). https://doi.org/10.1111/jofi.13071
2. Aizenman, J. (2019). International Reserves, Exchange Rates, and Monetary Policy: From the Trilemma to the Quadrilemma. In Oxford Research Encyclopedia of Economics and Finance. https://doi.org/10.1093/acrefore/9780190625979.013.313
3. Aizenman, J., Chinn, M. D., & Ito, H. (2008). Assessing the Emerging Global Financial Architecture: Measuring the Trilemma’s Configurations over Time.
4. Aizenman, J., Chinn, M. D., & Ito, H. (2011). Surfing the waves of globalization: Asia and financial globalization in the context of the trilemma. Journal of the Japanese and International Economies, 25(3). https://doi.org/10.1016/j.jjie.2011.06.003
5. Aizenman, J., & Ito, H. (2014). The more divergent, the better? Lessons on trilemma policies and crises for Asia. Asian Development Review, 31(2). https://doi.org/10.1162/ADEV_a_00030
6. Annicchiarico, B., & di Dio, F. (2015). Environmental policy and macroeconomic dynamics in a new Keynesian model. Journal of Environmental Economics and Management, 69(1). https://doi.org/10.1016/j.jeem.2014.10.002
7. Aquilante, T., di Pace, F., & Masolo, R. M. (2022). Exchange-rate and news: Evidence from the COVID pandemic. Economics Letters, 213. https://doi.org/10.1016/j.econlet.2022.110390
8. Arefjevs, I., & Bogdanova, O. (2020). International Finance Trilemma as a Tool for Balanced Development of an Economy. European Integration Studies, 1(14). https://doi.org/10.5755/j01.eis.1.14.26318
9. Armstrong, C. S., Glaeser, S., & Kepler, J. D. (2019). Accounting quality and the transmission of monetary policy. Journal of Accounting and Economics, 68(2–3). https://doi.org/10.1016/j.jacceco.2019.101265
10. Atish, G. (2003). Exchange rate regimes: choices and consequences. Choice Reviews Online, 40(11). https://doi.org/10.5860/choice.40-6524
11. Bar-Eli, M., Krumer, A., & Morgulev, E. (2020). Ask not what economics can do for sports - Ask what sports can do for economics. In Journal of Behavioral and Experimental Economics (Vol. 89). https://doi.org/10.1016/j.socec.2020.101597
12. Baxter, M., & Stockman, A. C. (1989). Business cycles and the exchange-rate regime. Some international evidence. Journal of Monetary Economics, 23(3). https://doi.org/10.1016/0304-3932(89)90039-1
13. Boughton, J. M. (2003). On the origins of the Fleming-Mundell model. IMF Staff Papers, 50(1). https://doi.org/10.5089/9781451852998.001
14. Boutros, M., & Witmer, J. (2020). Monetary Policy Implementation in a Negative Rate Environment. Journal of Money, Credit and Banking, 52(2–3). https://doi.org/10.1111/jmcb.12605
15. Caglayan, M., & Demir, F. (2014). Firm Productivity, Exchange Rate Movements, Sources of Finance, and Export Orientation. World Development, 54. https://doi.org/10.1016/j.worlddev.2013.08.012
16. Calvert Jump, R., Hommes, C., & Levine, P. (2019). Learning, heterogeneity, and complexity in the New Keynesian model. Journal of Economic Behavior and Organization, 166. https://doi.org/10.1016/j.jebo.2019.07.014
17. Caruana, J., & Avdjiev, S. (2012). Sovereign creditworthiness and financial stability:an international perspective. Financial Stability Review, 16. https://doi.org/10.1016/j.jclepro.2018.07.330
18. Chinn, M. D., & Ito, H. (2006). What matters for financial development? Capital controls, institutions, and interactions. Journal of Development Economics, 81(1). https://doi.org/10.1016/j.jdeveco.2005.05.010
19. Clerc, P. (2021). The Dynamics of Unemployment and Inflation in New Keynesian Models with Two Labor Margins. Journal of Money, Credit and Banking, 53(2–3). https://doi.org/10.1111/jmcb.12768
20. Connor, J. W. (1973). The neo-classical transport theory of a plasma with multiple ion species. Plasma Physics, 15(8). https://doi.org/10.1088/0032-1028/15/8/003
21. da Silva, S. (2001). Chaotic exchange rate dynamics redux. Open Economies Review, 12(3). https://doi.org/10.1023/A:1011181423098
22. Deng, M., & Fang, M. (2022). Debt maturity heterogeneity and investment responses to monetary policy. European Economic Review, 144, 104095. https://doi.org/10.1016/J.EUROECOREV.2022.104095
23. Desai, V., & Potter, R. B. (2021). 5 New institutional economics and development. In The Companion to Development Studies. https://doi.org/10.4324/9780203773420-10
24. Dong, F., Miao, J., & Wang, P. (2020). Asset bubbles and monetary policy. Review of Economic Dynamics, 37. https://doi.org/10.1016/j.red.2020.06.003
25. Eisner, R., & Nadiri, M. I. (1968). Investment Behavior and Neo-Classical Theory. The Review of Economics and Statistics, 50(3). https://doi.org/10.2307/1937931
26. Fagiolo, G., Giachini, D., & Roventini, A. (2020). Innovation, finance, and economic growth: an agent-based approach. Journal of Economic Interaction and Coordination, 15(3). https://doi.org/10.1007/s11403-019-00258-1
27. Francis, B. B., Hunter, D. M., & Kelly, P. J. (2011). Financial Market Openness and Monetary Policy Independence: Does the Impact of Monetary Policy Differ between Investable and Non-Investable Firms? SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1362328
28. Hamiani, K. M., Buessings-Loercks, M., & Fleuriet, V. (2020). Monetary Policy Under an Exchange Rate Anchor. IMF Working Papers, 20(180). https://doi.org/10.5089/9781513556383.001
29. Husain, A. M., Mody, A., & Rogoff, K. S. (2005). Exchange rate regime durability and performance in developing versus advanced economies. Journal of Monetary Economics, 52(1). https://doi.org/10.1016/j.jmoneco.2004.07.001
30. Jebeniani, J., & Trabelsi, J. (2022). Effects of the business cycle on real exchange rate misalignments with respect to exchange rate regimes. International Economics, 170, 92–102. https://doi.org/10.1016/J.INTECO.2022.02.009
31. Jeffrey A. Frankel, & Saravelos, G. (2010). Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Crisis. In NBER Working Paper No. 16047.
32. Kashyap Heena. (2015). Relevance of classicaland neo-classical theories in present world. Indian Streams Research Journal, 5(1).
33. Keane, W. (2019). How everyday ethics becomes a moral economy, and vice versa. Economics, 13. https://doi.org/10.5018/economics-ejournal.ja.2019-46
34. Kiat, J. (2008). The effect of exchange rate and inflation on foreign direct investment and its relationship with economic growth in South Africa. Economics and Applied Informatics, 17(1).
35. Kiley, M. T. (2016). Policy paradoxes in the New Keynesian model. Review of Economic Dynamics, 21. https://doi.org/10.1016/j.red.2016.03.002
36. Kudryashov, N. A., & Zakharchenko, A. S. (2014). A note on solutions of the generalized Fisher equation. Applied Mathematics Letters, 32(1). https://doi.org/10.1016/j.aml.2014.02.009
37. Manova, K. (2008). Credit constraints, equity market liberalizations and international trade. Journal of International Economics, 76(1). https://doi.org/10.1016/j.jinteco.2008.03.008
38. Megasari, T., & Saleh, S. (2021). Determinant of FDI Inflows in OIC Countries. International Journal of Islamic Economics and Finance (IJIEF), 4(1). https://doi.org/10.18196/ijief.v4i1.9473
39. Mishkin, F. S. (2009). Globalization, macroeconomic performance, and monetary policy. Journal of Money, Credit and Banking, 41(SUPPL. 1). https://doi.org/10.1111/j.1538-4616.2008.00204.x
40. Mundell, R. A. (1963). Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates. In Science politique (Vol. 29, Issue 4).
41. North, D. (1993). The New Institutional Economics and Development. EconWPA Economic History, January.
42. Obstfeld, M., Shambaugh, J. C., & Taylor, A. M. (2004). Monetary sovereignty, exchange rates, and capital controls: The Trilemma in the interwar period. IMF Staff Papers, 51(SPEC. ISS.).
43. Obstfeld, M., Shambaugh, J. C., & Taylor, A. M. (2008). Financial Stability, the Trilemma, and International Reserves Maurice. NBER Working Paper, 14217(April).
44. Obstfeld, M., Shambaugh, J. C., & Taylor, A. M. (2009). Financial instability, reserves, and central bank swap lines in the panic of 2008. American Economic Review, 99(2). https://doi.org/10.1257/aer.99.2.480
45. Obstfeld, M., Shambaugh, J. C., & Taylor, A. M. (2010). Financial stability, the trilemma, and international reserves. American Economic Journal: Macroeconomics, 2(2). https://doi.org/10.1257/mac.2.2.57
46. Ojapinwa, T. v., & Nwokoma, N. I. (2018). Workers’ Remittances and the Dutch-Disease Argument: Investigating the Relationship in Sub-Saharan Africa. African Development Review, 30(3). https://doi.org/10.1111/1467-8268.12339
47. Omankhanlen, A. E. (2011). The Effect of Exchange Rate and Inflation on Foreign Direct Investment and Its Relationship with Economic Growth in Nigeria. Economics and Applied Informatics, 17(1).
48. Razin, A., Rubinstein, Y., & Berglas, E. (2004). NBER working paper series growth effects of the exchange-rate regime and the capital-account openness in a crisis-prone world market: a nuanced view Growth Effects of the Exchange-Rate Regime and the Capital-Account Openness in A Crisis-Prone World Market: A Nuanced View. http://www.nber.org/papers/w10555
49. Tran, H. H., Le, T. P. T. D., Nguyen, V. T. H., Le, D. T. A., & Trinh, N. H. (2021). The Impact of Financial Integration on Monetary Policy Independence: The Case of Vietnam. Journal of Asian Finance, Economics and Business, 8(2). https://doi.org/10.13106/jafeb.2021.vol8.no2.0791
50. Waldén, L. J., Meade, J. E., & Walden, L. J. (1961). A Neo-Classical Theory of Economic Growth. Ekonomisk Tidskrift, 63(3). https://doi.org/10.2307/3438723
51. Woodford, M. (2013). Globalization and Monetary Control. In International Dimensions of Monetary Policy. https://doi.org/10.7208/chicago/9780226278872.003.0002
52. Yokus, A., & Yavuz, M. (2021). Novel comparison of numerical and analytical methods for fractional burger⇓fisher equation. Discrete and Continuous Dynamical Systems - Series S, 14(7). https://doi.org/10.3934/DCDSS.2020258
53. Yu, Y., & Qayyum, | Muhammad. (2021). Impacts of financial openness on economic complexity: Cross-country evidence. https://doi.org/10.1002/ijfe.2491
54. Zhang, T. (2022). Monetary Policy Spillovers through Invoicing Currencies. Journal of Finance, 77(1). https://doi.org/10.1111/jofi.13071
Published
2022-09-30
How to Cite
Nshimiyimana, Y. C., & Habimana, T. (2022). Effect of Impossible Trinity on Investment in Developing Countries: Evidence from Africa. International Journal on Economics, Finance and Sustainable Development, 4(9), 108-128. Retrieved from https://journals.researchparks.org/index.php/IJEFSD/article/view/3603
Section
Articles
