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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 simultaneously maintain monetary independence, exchange rate stability and financial integration subject to the constraints imposed by the Trilemma, in an era of widespread globalization. In this paper we overview and contrast the Trilemma policy choices and tradeoffs faced by the two key drivers of global economic growth-China and India. China’s Trilemma configurations are unique relative to other emerging markets in the predominance of exchange rate stability, and in the failure of the Trilemma regression to capture a consistently significant role for financial integration. In contrast, the Trilemma configurations of India are in line with choices made by other emerging countries. India like other emerging economies has overtime converged towards a middle ground between the three policy objectives, and has achieved comparable levels of exchange rate stability and financial integration buffered by sizeable international reserves.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39798.

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Date of creation: 01 Nov 2011
Date of revision: 03 Jul 2012
Handle: RePEc:pra:mprapa:39798

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Keywords: Financial trilemma; International reserves; Foreign exchange intervention; Monetary policy; Capital account openness;

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References

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  1. Joshua Aizenman & Reuven Glick, 2008. "Sterilization, Monetary Policy, and Global Financial Integration," NBER Working Papers 13902, National Bureau of Economic Research, Inc.
  2. Ajay Shah, 2008. "New issues in Indian macro policy," Working Papers id:1478, eSocialSciences.
  3. Sebastian Edwards & Eduardo Levy Yeyati, 2004. "Flexible Exchange Rates as Shock Absorbers," Business School Working Papers exchangerates, Universidad Torcuato Di Tella.
  4. Hutchison, Michael & Kendall, Jake & Pasricha, Gurnain & Singh, Nirvikar, 2009. "Indian capital control liberalization: Evidence from NDF markets," Working Papers 09/60, National Institute of Public Finance and Policy.
  5. Glick, Reuven & Hutchison, Michael, 2009. "Navigating the trilemma: Capital flows and monetary policy in China," Journal of Asian Economics, Elsevier, vol. 20(3), pages 205-224, May.
  6. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2008. "Financial Stability, the Trilemma, and International Reserves," NBER Working Papers 14217, National Bureau of Economic Research, Inc.
  7. Vladimir Sokolov & Byung‐Joo Lee & Nelson C. Mark, 2011. "Linkages Between Exchange Rate Policy And Macroeconomic Performance," Pacific Economic Review, Wiley Blackwell, vol. 16(4), pages 395-420, October.
  8. Michael Hutchison & Rajeswari Sengupta & Nirvikar Singh, 2012. "India’s Trilemma: Financial Liberalisation, Exchange Rates and Monetary Policy," The World Economy, Wiley Blackwell, vol. 35(1), pages 3-18, 01.
  9. Aizenman, Joshua & D. Chinn, Menzie & Ito, Hiro, 2009. "Surfing the Waves of Globalization: Asia and Financial Globalization in the Context of the Trilemma," ADB Economics Working Paper Series 180, Asian Development Bank.
  10. R. Kohli, 2012. "India’s Experience in Navigating the Trilemma : Do Capital Controls Help?," Governance Working Papers 23184, East Asian Bureau of Economic Research.
  11. Patnaik, Ila & Shah, Ajay & Sethy, Anmol & Balasubramaniam, Vimal, 2010. "The exchange rate regime in Asia: From crisis to crisis," Working Papers 10/69, National Institute of Public Finance and Policy.
  12. ChangJin Kim & Jong-Wha Lee, 2008. "Exchange Rate Regime And Monetary Policy Independence In East Asia," Pacific Economic Review, Wiley Blackwell, vol. 13(2), pages 155-170, 05.
  13. Joshua Aizenman & Menzie D. Chinna & Hiro Ito, 2010. "The Financial Crisis, Rethinking of the Global Financial Architecture, and the Trilemma," Working Papers id:3138, eSocialSciences.
  14. Prema-chandra Athukorala, 2009. "Outward Direct Investment from India," Departmental Working Papers 2009-14, The Australian National University, Arndt-Corden Department of Economics.
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Cited by:
  1. 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, vol. 0(4(569)), pages 49-58, April.
  2. Herrala, Risto & Cheung, Yin-Wong, 2013. "China’s capital controls – Through the prism of covered interest differentials," BOFIT Discussion Papers 22/2013, Bank of Finland, Institute for Economies in Transition.
  3. Guonan Ma & Robert N McCauley, 2013. "Is China or India more financially open?," BIS Working Papers 410, Bank for International Settlements.
  4. 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 0764, Department of Economics, Tufts University.
  5. Yu Hsing, 2012. "Impacts of the Trilemma Policies on Inflation, Growth and Volatility in Greece," International Journal of Economics and Financial Issues, Econjournals, vol. 2(3), pages 373-378.
  6. Sen Gupta, Abhijit & Sengupta, Rajeswari, 2013. "Management of Capital Flows in India: 1990-2011," MPRA Paper 46217, University Library of Munich, Germany.

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