VALIDITY OF TRILEMMA THEORY – PANEL ANALYSIS OF NEW EU MEMBER STATES

Abstract

This paper examines the validity of the “trilemma" theory which implies the inability to achieve the stability of the exchange rate, an independent monetary policy and free flow of capital at a given time. The theory is examined on the example of nine new EU member states. Bearing in mind that financial integration is a feature of modern economic trends; our first assumption is defined in such a way that the choice of the exchange rate regime has an implication on the monetary policy. This hypothesis is tested using the linear functional form proposed by Aizenman et al. (2013). The obtained results confirm the validity of the theory in nine new EU members from 2000 to the present day.