Document Type : Article-Based Dissertations
Authors
1 Ph.D. student in economics
2 Department of Economics, Faculty of Economics, Allameh Tabataba'i University, Tehran, Iran
3 Economic department of Allameh Tabatabai University
4 dr Faculty member of Economics, Allameh Tabataba'i University
Abstract
In this article, the impossible trilemma theory is used to assess the stability of international macroeconomic arrangements, this theory states that it is impossible for a country to simultaneously achieve all three goals of exchange rate stability, financial market openness, and independent monetary policy. Using data from 1978 to 2023, the relationship between the impossible trinity policy, foreign reserves, and trade openness for the Iran’s economy will be analyzed. The ARDL and NARDL bounds tests confirm the long-term relationship between the impossible trinity policy, foreign reserves, and trade openness. Additionally, using a nonlinear threshold model, the threshold level of foreign reserves for the Iranian economy is estimated, at which the indicators of the impossible trinity will reach relative stability. The findings of this study indicate that below this threshold level, dispersion among the three components of the trilemma in Iran has a positive relationship with the level of foreign reserves. Therefore, achieving a stable exchange rate, monetary policy independence, and an open economy simultaneously will be more challenging for the government. Furthermore, when foreign reserves are above the mentioned threshold, the irrelevance of the reserves' amount on the stability of the impossible trinity indicators is reported. Moreover, when foreign reserves are above the mentioned threshold, the insignificance of reserve levels on the stability of the Impossible Trinity indices is reported. Furthermore, foreign exchange reserves have significant benefits and advantages for the country, and their management should take these into account to maximize their potential in enhancing economic stability and resilience. Properly managed reserves can provide a buffer against economic shocks, support the national currency, and enhance investor confidence, ultimately contributing to the overall economic health and sustainability of the country.
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