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The Financial Trilemma in China and a Comparative Analysis with India

  • Aizenman, Joshua
  • Sengupta, Rajeswari

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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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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  1. Shah, Ajay, 2008. "New issues in Indian macro policy," Working Papers 08/51, National Institute of Public Finance and Policy.
  2. 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.
  3. 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, vol. 25(3), pages 290-320, September.
  4. Ila Patnaik & Ajay Shah & Anmol Sethy & Vimal Balasubramaniam, 2010. "The exchange rate regime in Asia : From Crisis to Crisis," Finance Working Papers 21852, East Asian Bureau of Economic Research.
  5. S. Mahendra Dev, 2008. "India," Chapters, in: Handbook on the South Asian Economies, chapter 1 Edward Elgar.
  6. Aizenman, Joshua & Chinn, Menzie & Ito, Hiro, 2010. "The Financial Crisis, Rethinking of the Global Financial Architecture, and the Trilemma," ADBI Working Papers 213, Asian Development Bank Institute.
  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. Sebastian Edwards & Eduardo Levy Yeyati, 2003. "Flexible Exchange Rates as Shock Absorbers," NBER Working Papers 9867, National Bureau of Economic Research, Inc.
  9. Hutchison, Michael & Kendall, Jake & Pasricha, Gurnain & Singh, Nirvikar, 2010. "Indian Capital Control Liberalization: Evidence from NDF Markets," MPRA Paper 21771, University Library of Munich, Germany.
  10. Prema-chandra Athukorala, 2009. "Outward Direct Investment from India," Departmental Working Papers 2009-14, The Australian National University, Arndt-Corden Department of Economics.
  11. Joshua Aizenman & Reuven Glick, 2008. "Sterilization, Monetary Policy, and Global Financial Integration," NBER Working Papers 13902, National Bureau of Economic Research, Inc.
  12. 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.
  13. 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.
  14. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2010. "Financial Stability, the Trilemma, and International Reserves," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 57-94, April.
  15. R. Kohli, 2012. "India’s Experience in Navigating the Trilemma : Do Capital Controls Help?," Governance Working Papers 23184, East Asian Bureau of Economic Research.
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