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China's trilemma: monetary policy autonomy in an economy with a managed floating exchange rate


  • Huiqing Li
  • Yixuan Xu
  • Ying Zhuang


Mundell's trilemma theory says that capital flow, exchange rate stability, and monetary policy autonomy cannot be achieved simultaneously. Using monthly data from the People's Bank of China from 1999 to 2019, we find that the trilemma theory is not nearly as tight in China's practice as in theory, and the central bank can internally offset the effect of exchange rate volatility by ways other than the monetary base (such as central bank securities). Our results also indicate that, before 2012, monetary policy autonomy in China was weak due to the problem of ‘funds outstanding for foreign exchange’. With the reform of the Renminbi (RMB) exchange rate system in 2005, the effectiveness of central bank securities in compensating for the flow of foreign exchange reserves has gradually been strengthened in China.

Suggested Citation

  • Huiqing Li & Yixuan Xu & Ying Zhuang, 2021. "China's trilemma: monetary policy autonomy in an economy with a managed floating exchange rate," Asian-Pacific Economic Literature, Asia Pacific School of Economics and Government, The Australian National University, vol. 35(1), pages 99-107, May.
  • Handle: RePEc:bla:apacel:v:35:y:2021:i:1:p:99-107
    DOI: 10.1111/apel.12321

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    References listed on IDEAS

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    7. Yu Hsing, 2012. "Test of the trilemma for five selected Asian countries and policy implications," Applied Economics Letters, Taylor & Francis Journals, vol. 19(17), pages 1735-1739.
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    Cited by:

    1. Ying Wu, 2023. "Monetary sterilization response to the movements in exchange rates and official net foreign assets: a case of China," Review of Quantitative Finance and Accounting, Springer, vol. 60(2), pages 821-838, February.

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