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The Financial Trilemma in China and a Comparative Analysis with India

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  • Aizenman, Joshua
  • Sengupta, Rajeswari

Abstract

A key challenge facing most emerging market economies today is how to simultaneouslymaintain monetary independence, exchange rate stability and financial integration subjectto the constraints imposed by the Trilemma, in an era of widespread globalization. In thispaper we overview and contrast the Trilemma policy choices and tradeoffs faced by thetwo key drivers of global economic growth-China and India. China’s Trilemmaconfigurations are unique relative to other emerging markets in the predominance ofexchange rate stability, and in the failure of the Trilemma regression to capture aconsistently significant role for financial integration. In contrast, the Trilemmaconfigurations of India are in line with choices made by other emerging countries. Indialike other emerging economies has overtime converged towards a middle ground betweenthe three policy objectives, and has achieved comparable levels of exchange rate stabilityand financial integration buffered by sizeable international reserves

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt2xn3238g.

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Date of creation: 18 Mar 2012
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Handle: RePEc:cdl:ucscec:qt2xn3238g

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Keywords: Social and Behavioral Sciences; Financial Trilemma; International reserves; Foreign exchange intervention; Monetary policy; Capital account openness;

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  1. Michael Hutchison & Rajeswari Sengupta & Nirvikar Singh, 2012. "India’s Trilemma: Financial Liberalisation, Exchange Rates and Monetary Policy," The World Economy, Wiley Blackwell, Wiley Blackwell, vol. 35(1), pages 3-18, 01.
  2. Hutchison, Michael & Kendall, Jake & Pasricha, Gurnain Kaur & Singh, Nirvikar, 2009. "Indian Capital Control Liberalization: Evidence from NDF Markets," MPRA Paper, University Library of Munich, Germany 13630, University Library of Munich, Germany.
  3. Ajay Shah, 2008. "New issues in Indian macro policy," Working Papers, eSocialSciences id:1478, eSocialSciences.
  4. Aizenman, Joshua & Chinn, Menzie D. & Ito, Hiro, 2011. "Surfing the waves of globalization: Asia and financial globalization in the context of the trilemma," Journal of the Japanese and International Economies, Elsevier, Elsevier, vol. 25(3), pages 290-320, September.
  5. Obstfeld, Maurice & Shambaugh, Jay C & Taylor, Alan M, 2008. "Financial Stability, the Trilemma, and International Reserves," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6693, C.E.P.R. Discussion Papers.
  6. Reuven Glick & Michael Hutchison, 2008. "Navigating the trilemma: capital flows and monetary policy in China," Working Paper Series, Federal Reserve Bank of San Francisco 2008-32, Federal Reserve Bank of San Francisco.
  7. Ila Patnaik & Ajay Shah & Anmol Sethy & Vimal Balasubramaniam, 2010. "The exchange rate regime in Asia : From Crisis to Crisis," Finance Working Papers, East Asian Bureau of Economic Research 21852, East Asian Bureau of Economic Research.
  8. Prema-chandra Athukorala, 2009. "Outward Direct Investment from India," Departmental Working Papers, The Australian National University, Arndt-Corden Department of Economics 2009-14, The Australian National University, Arndt-Corden Department of Economics.
  9. Joshua Aizenman & Menzie D. Chinna & Hiro Ito, 2010. "The Financial Crisis, Rethinking of the Global Financial Architecture, and the Trilemma," Working Papers, eSocialSciences id:3138, eSocialSciences.
  10. Sebastian Edwards & Eduardo Levy Yeyati, 2004. "Flexible Exchange Rates as Shock Absorbers," Business School Working Papers, Universidad Torcuato Di Tella exchangerates, Universidad Torcuato Di Tella.
  11. Vladimir Sokolov & Byung‐Joo Lee & Nelson C. Mark, 2011. "Linkages Between Exchange Rate Policy And Macroeconomic Performance," Pacific Economic Review, Wiley Blackwell, Wiley Blackwell, vol. 16(4), pages 395-420, October.
  12. Joshua Aizenman & Reuven Glick, 2009. "Sterilization, Monetary Policy, and Global Financial Integration," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 17(4), pages 777-801, 09.
  13. R. Kohli, 2012. "India’s Experience in Navigating the Trilemma : Do Capital Controls Help?," Governance Working Papers, East Asian Bureau of Economic Research 23184, East Asian Bureau of Economic Research.
  14. ChangJin Kim & Jong-Wha Lee, 2008. "Exchange Rate Regime And Monetary Policy Independence In East Asia," Pacific Economic Review, Wiley Blackwell, Wiley Blackwell, vol. 13(2), pages 155-170, 05.
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Cited by:
  1. Ma, Guonan & McCauley, Robert N., 2013. "Is China or India more financially open?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 39(C), pages 6-27.
  2. Yu HSING, 2012. "Effects of the Trilemma Policies on Inflation, Growth and Volatility in Bulgaria," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(4(569)), pages 49-58, April.
  3. Marcelo Bianconi & Joe A. Yoshino & Mariana O. Machado de Sousa, 2011. "BRIC and the U.S. Financial Crisis: An Empirical Investigation of Stocks and Bonds Markets," Discussion Papers Series, Department of Economics, Tufts University, Department of Economics, Tufts University 0764, Department of Economics, Tufts University.
  4. Yin-Wong Cheung & Risto Herrala, 2013. "China's Capital Controls - Through the Prism of Covered Interest Differentials," Working Papers, Hong Kong Institute for Monetary Research 142013, Hong Kong Institute for Monetary Research.
  5. Sen Gupta, Abhijit & Sengupta, Rajeswari, 2013. "Management of Capital Flows in India: 1990-2011," MPRA Paper, University Library of Munich, Germany 46217, University Library of Munich, Germany.
  6. Yu Hsing, 2012. "Impacts of the Trilemma Policies on Inflation, Growth and Volatility in Greece," International Journal of Economics and Financial Issues, Econjournals, Econjournals, vol. 2(3), pages 373-378.

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