“Impossible Trinity” effects on Macroeconomic performance in Non-oil Arab Economies: Evidence from Egypt, Jordan, Lebanon, Morocco, and Tunisia

Monetary policy autonomy, exchange rate stability and free capital mobility are critical macroeconomic goals for all countries. However, Mundel-Fleming's impossible trinity hypothesis states that the extreme cases for these three goals cannot be targeted simultaneously. Despite the multiplicity of literature focused on testing the validity of impossible trinity, few empirical studies focused on its impact on macroeconomic performance. Neither these empirical studies nor the theoretical framework agreed on the validity of impossible trinity or its impacts on macroeconomic performance, particularly in developing countries. This study tests mainly the impact of impossible trinity indices on macroeconomic performance. The study uses deductive approach applied on five Non-oil Arab Economies using panel macroeconomic data. Two models are estimated for the period 1977-2021 using system generalized method of moments. Results confirmed the dynamic nature of macroeconomic performance, the validity of impossible trinity in sample countries and the significance of impossible trinity on affecting macroeconomic performance. More specifically, output volatility and inflation rates decrease by having greater capital openness and greater exchange rates stability. Inflation rate only can be reduced by greater monetary autonomy. Supportive policies are proposed to effectively improve macroeconomic performance relying on impossible trinity.